GS Paper 3
Syllabus: Money laundering-related issues
Source: IE
Context: The Finance Ministry has amended the Prevention of Money Laundering Act (PMLA) and rules in line with the recommendations of the FATF – the global money laundering and terrorist financing watchdog.
Background:
- The government has been struggling to deal with the pandemic-era upsurge in advertisements soliciting investment in virtual assets.
- A 2021 report estimated India with the highest number of ‘crypto owners’ (10.07 crore), more than threefold than the 2nd-ranked U.S.
- ED was investigating several cases related to cryptocurrency frauds wherein crypto exchanges were involved in money laundering.
Why these amendments?
- To incorporate more disclosures for NGOs by reporting entities like financial institutions (FIs), banking companies, or intermediaries.
- To define “politically exposed persons” (PEPs).
| Amendments | Significance |
| ● Defines PEPs: As individuals who have been entrusted with prominent public functions by a foreign country, including the
○ Heads of State/Governments, ○ Senior politicians, ○ Senior government/judicial/military officers, ○ Senior executives of state-owned corporations and ○ Important political party officials ● The amendment is in relation to foreign PEPs and not domestic ones |
● The move brings legal uniformity and removes ambiguities (in line with FATF norms) before India’s proposed FATF assessment.
● This will help India tackle illicit financial flows (that fuel crime and terrorism) |
| ● ‘Beneficial Owners’: Lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner.
○ The term ‘beneficial owner’ are those with the entitlement of more than 25% of shares or capital or profit of the company, which has now been reduced to 10%. |
● In line with the Companies Act (2013) and Income-tax Act (1961).
● Bringing more indirect participants within the reporting net |
| ● NPOs: Reporting entities are now required to register details of the client if it’s a non-profit organization (NPO) on the DARPAN portal of NITI Aayog.
○ The definition of an NPO includes any entity or organization, constituted for religious or charitable purposes under I-T Act |
|
| ● Due diligence documentation requirements: It has now been extended.
○ It now includes the submission of details such as names of persons holding senior management positions, names of partners, etc. |
● Until now limited to obtaining the basic KYCs of clients such as registration certificates, PAN copies, etc. |
| ● For Cryptocurrencies: Virtual digital assets (VDA) trade has been brought under PMLA.
○ New rules mandate crypto exchanges and intermediaries dealing in virtual assets to maintain the KYCs of their clients and report suspicious transactions to financial intelligence units. |
● It will prevent the misuse of crypto, and NFTs through money laundering and other illegal activities. |
Conclusion: The decision to mandatorily bring all trade in virtual digital assets under the PMLA now lays the onus of ascertaining the place of origin of all activities in such assets upon individuals and businesses.
Insta Links:
By upholding PMLA, SC puts its stamp on Kafka’s law
Mains Links:
Money laundering poses a serious security threat to a country’s economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace? (UPSC 2013)
