‘Politically exposed persons’ brought under new PMLA rules, more disclosures for NGOs

The FATF is the global money laundering and terrorist financing watchdog.

“PEP has already been in the RBI’s master circular, in line with FATF. The definition has now been given in the PMLA rules so that the same definition is applicable everywhere,” a senior government official told The Indian Express.

The amendments assume significance ahead of the proposed FATF assessment of India, which is expected to be undertaken later this year. India’s assessment is likely to come up for discussion in the plenary discussion in June, while the possible onsite assessment is slated for November.

Due to the pandemic and pause in the FATF’s assessment process, the fourth round of mutual evaluation of India had been postponed to 2023. Before this, the FATF had undertaken an evaluation for India in June 2010.

In a notification dated March 7, the Department of Revenue under the Ministry of Finance brought in The Prevention of Money Laundering (Mainten-ance of Records) Amendment Rules, 2023, which prescribe disclosures of beneficial owners beyond the current requirement of KYC norms through documents such as registration certificates and PAN by reporting entities such as financial institutions, banking companies or intermediaries.

The new clause in the rules for PMLA compliance defines “Politically Exposed Persons” (PEPs) as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.

In line with existing provisions of The Income-Tax Act and The Companies Act, the amended rules have now lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner.

“Lowering of threshold for beneficial ownership has been done to bring PMLA in line with Companies Act and Income-tax Act,” the official said.

“The term ‘beneficial owner’ was inter alia defined to mean ownership of or entitlement to more than 25 percent of shares or capital or profit of the company. The threshold of 25 per cent is now reduced to 10 per cent, thereby bringing more indirect participants within the reporting net,” Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP, said.

Reporting entities are also required to register details of the client if it’s a non-profit organisation on the DARPAN portal of NITI Aayog.

“Every Banking Company or Financial Institution or intermediary, as the case may be, shall register the details of a client, in case of client being a non-profit organisation, on the DARPAN Portal of NITI Aayog, if not already registered, and maintain such registration records for a period of five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later,” the notification said.

“This has been in the works for some time. The purpose is to have some repository of basic information on all NGOs in the Darpan portal of NITI Aayog,” the official said.

The due diligence documentation requirements which were until now limited to obtaining the basic KYCs of clients such as registration certificates, PAN copies and documents of officers holding an attorney to transact on behalf of the client, have now been extended.

It now includes submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlors and authors, as the case may be, depending upon the legal form of organisation. Also, the details of registered office address and principal place of business are now required to be submitted by clients to financial institutions, banking companies or intermediaries.

“The definition of non-profit organisation has been amended and linked to the definition of charitable purpose provided under Section 2(15) of the Income Tax Act, 1961. The newly extended record-keeping requirements would go a long way in discovering money laundering activities, which taints the social and economic fabric of the country,” Jhunjhunwala said.

An official said the broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment. There are 40 FATF recommendations that cover seven areas and provide a framework of measures to help countries tackle illicit financial flows through laws, regulations and operational measures to ensure authorities can take action to detect and disrupt financial flows that fuel crime and terrorism.

The recommendations are divided into seven areas: anti-money laundering/counter-terrorist financing; policies and coordination; money laundering and confiscation; terrorist financing and financing of proliferation; preventive measures; transparency and beneficial ownership of legal persons and arrangements; powers and responsibilities of competent authorities and other institutional measures; and, international cooperation.