Context: 

The Ministry of Finance has amended money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries.

• The ministry also defined “politically exposed persons” (PEPs) under the Prevention of Money Laundering Act (PMLA) in line with FATF recommendations.

What are the changes in the PMLA rules?

• Reduced threshold for identifying beneficial owners: Amended rules align with Companies Act and Income-tax Act to reduce the limit for reporting entities to identify beneficial owners.
  • The term ‘beneficial owner’ was defined to mean ownership of or entitlement to more than 25 % of shares or capital or profit of the company, which has now been reduced to 10% thereby bringing more indirect participants within the reporting net.
• Politically Exposed Persons(PEPs): New PMLA compliance rules define foreign “Politically Exposed Persons” (PEPs) as individuals entrusted with prominent public functions by a foreign country. 
  • This includes heads of state or governments, senior politicians, government, judicial or military officers, executives of state-owned corporations, and important political party officials. 
  • Domestic PEPs are not covered under this amendment. 
  • This move to define PEPs under PMLA is to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions which had defined PEPs in line with FATF norms.
• NGOs: Reporting entities must register non-profit organizations on NITI Aayog’s DARPAN portal and keep registration records for five years after the end of the business relationship or account closure.
  • It now includes submission of details such as names of persons holding senior management positions, names of partners, names of beneficiaries, trustees, settlers and authors, details of the registered office address and principal place of business among others.

Significance: 

• The amendments to the money laundering rules are significant ahead of India’s upcoming Financial Action Task Force (FATF) assessment, which is expected to be conducted later this year.
  • It will bring in legal uniformity and remove ambiguities before the FATF assessment.
• 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.

Recommendations of FATF:

• The FATF recommends that financial institutions should have appropriate risk-management systems.
• These systems should be used to determine whether a customer or beneficial owner is a domestic politically exposed person (PEP).
• The systems should also determine whether the customer or beneficial owner is a person who is or has been entrusted with a prominent function by an international organization.

News Source: The Indian Express