New PMLA tweak increases ED scrutiny of NGOs and ‘politically exposed persons’

The central government changed rules on money laundering, bringing non-governmental organizations (NGOs) and “politically exposed persons” under tighter scrutiny, vastly expanding the range of people and entities whose financial transactions can be traced to agencies. Like the Enforcement Directorate will have access.

Rs 3 crore was seized during searches by the Enforcement Directorate in Jharkhand’s Hazaribagh district as part of the ongoing money laundering probe against IAS officer Pooja Singhal. (Representational/PTI)

The expanded definition also includes cryptocurrencies under the provisions of Monitoring Illicit Financial Flows.

The rules were revealed by the Union finance ministry late on Tuesday as part of two gazette notifications, including one relating to politically exposed persons (PEPs), persons working for a foreign country, senior politicians, political Covers party functionaries, senior bureaucrats. judges, and military personnel.

For these people as well as NGOs, banks will be required to maintain records on the nature and value of transactions, The new rules also add how this information will be shared, the period for which such data will be retained, and the process for how the identity records of such customers will be maintained by banking companies, financial institutions and intermediaries. Has been done. ,

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“The new rules make it mandatory for banking/financial companies to record transactions of several entities and individuals, which were earlier not covered under the PMLA (Prevention of Money Laundering Act). The provisions for financial reporting purposes under the PMLA include virtually everyone important in politics, senior government officials and even heads of states,” said a senior official of the Enforcement Directorate, asking not to be named.

To ensure this, financial institutions are required to conduct additional Know Your Customer (KYC) checks for PEP under the guidelines of the Reserve Bank of India. The new rules now mandate additional transaction recording under PMLA compliance.

The ED is the lead agency probing charges under the PMLA.

For non-governmental organizations, the new rules add more data retention requirements: Every banking company or financial institution must register details of such a customer on NITI Aayog’s Darpan portal and record, if not already registered, certain period should be maintained for Five years “after the termination of the business relationship between a client and a reporting entity or the closure of the account, whichever is later.”

Experts flagged some concerns.

Manvendra Mishra, partner, Khaitan & Co, said: “The amendment aims to widen the scope of the definition of such beneficial owner of an entity and provides for a revised reporting mechanism. The definition of PEP, however, leaves much to interpretation.” and in the absence of clear markers as to which rank, for how long after leaving office, a person would be considered a PEP, it would give too much discretion to the officers. Such discretion, if not curbed, could easily be misused and it would be best to define the ambiguities left in this amendment.”

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The changes to PMLA rules announced in a separate notification include those related to cryptocurrencies, which will now be brought under the purview of the money laundering watchdog.

These rules cover a host of activities carried out “for or on behalf of” another person through cryptocurrencies such as bitcoin and ethereum under the PMLA. Notified activities include transactions between fiat currencies and crypto, transactions between one crypto and another, custody of such assets and participating in or offering financial services based on the same.

In other words, it will cover those dealing with transactions as well as those offering crypto-based financial services, such as some of the popular Web3 financial services.

A second official aware of the ED probe said the agency was already probing several cases related to cryptocurrencies, and the new rules would clarify the legal position for the agency as well as those perpetrating frauds through such modes of digital currency. do.

“Some crypto exchanges were also found allegedly involved in money laundering and ED took action on them,” he added. Till January 2023, ED attached crime proceedings of approx. 940 crore, five people have been arrested and many cases are pending in courts, he said.

The government has recently expressed concern over irregularities by cryptocurrency exchanges, e-wallets and mobile gaming apps. Several exchanges and apps such as WazirX and Coinswitch have been probed by the ED in the last one year.

As of now, cryptocurrencies are unregulated in India, although the government imposes a tax on their withdrawal in rupees. The Reserve Bank of India (RBI) has opposed any measure that could legalize their use as an investment or currency, saying they could adversely affect the Indian economy.

Experts said the move would bring clarity in dealing with money laundering and terror funding. Anu Tiwari, partner at law firm Cyril Amarchand Mangaldas, called it “positive and much needed for India’s growing Web 3 industry”.

According to the second official cited above, the notification related to NGOs is also aimed at strengthening the ED’s scrutiny on “religious or charitable” NGOs.

Abhimanyu Kampani, partner, Luthra & Luthra Law Offices India, said the amendment has broadened the definition of non-profit organization to include organizations that work for charitable purposes, including relief to the poor, education or medical treatment. Relief etc.

“Furthermore, a new category of Politically Exposed Persons (PEPs) has been defined, which will be subjected to greater scrutiny. Further, financial institutions will be required to mandatorily register details of non-profit organizations on the NITI Aayog portal. and maintain such record for at least five years.

Representatives of the crypto industry welcomed the move concerning them. Dilip Senberg, founder and CEO of crypto-fintech platform Muffinpay, said: “This is a positive step towards regulation of the cryptocurrency industry in India. Additionally, it guarantees that all cryptocurrency businesses have the necessary KYC, transaction monitoring, etc. Following the enactment of the PMLA, cryptocurrency companies will now be required to conduct due diligence as required by law.”

Anuj Chowdhary a crypto policy analyst said that this is “a good step” for Indian crypto businesses. “Now, they can streamline their operations as per the Prevention of Money Laundering Act (PMLA) guidelines. Earlier, crypto startups were self-reporting their business without any compliance. Noticeable exodus seen in islands, Dubai, Caribbean Islands etc,” he said.

“The purpose of this notification is to provide virtual digital assets[वीडीए]To eliminate money laundering through Individuals who were trying to find ways of money laundering through crypto will now face stern action from the law enforcement agencies. These individuals or web3 startups cannot avoid tax and move money to safe places. Now, they will mandatorily have to give financial reports to the Government of India,” he said.

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