Companies and Directors Embrace PMLA Reforms as India gets ready for FATF Evaluation

The year was 1998. The sun beat down on the Parliament House, the air felt dense, and the lawmakers looked tensed in their suits. But there was no time to be uncomfortable. The Finance Minister, Mr Yashwant Sinha, was about to introduce a bill that would change the way India fought money laundering.

Hold on! We are not narrating some storyline here! This is about the chronicle of the PMLA Act, which the Central Government most recently amended in May 2023. 

Before diving deeper into the details, let’s first look at the history of the PMLA Act.

History of the PMLA Act 

On August 4, 1998, former Finance Minister of India, Mr. Yashwant Sinha, introduced the Prevention of Money Laundering Bill to Parliament. However, the bill was sent to the Standing Committee on Finance for review, and it wasn't until 1999 that they presented their report to the Lok Sabha.

The government took the suggestions of the Standing Committee to heart and revised the bill accordingly. In the same year, they presented the updated version of the bill to Parliament, and it finally received the President's assent in 2002, and the act went into effect on July 1st, 2005.

This may sound like just another piece of legislation. But in reality, it was a step forward in the fight against financial crime. With the Act in place, authorities were better equipped to track and prosecute those involved in money laundering, sending a clear message that such activities would not be tolerated.

Let's dive into its & bits of the Prevention of Money Laundering Act (PMLA) 2002 and how it is widening the net to implement FATF Compliance.

How PMLA is Widening its Net to Enhance India’s FATF Compliance?

The PMLA was enacted in 2002 to prevent and control money laundering and confiscating proceeds of crime. It was amended in 2012 to bring it in line with international standards, and further amendments have been made in recent years to widen its scope and increase its effectiveness.

In the current scenario, the PMLA is being used to crack down on shell companies and prepare for the upcoming compliance review by the Financial Action Task Force (FATF) in November 2023. 

The government has designated directors of companies, partners of firms, trustees of express trusts, and even nominee shareholders as "reporting entities" under the Act. Meanwhile, they are expected to initiate and know your customer (KYC) norms, maintain relevant records, and report suspicious transactions to the Financial Intelligence Unit (FIU) director. Failure to comply with these regulations may lead to prosecution under the PMLA.

The recent move to include more professionals under the ambit of the PMLA was triggered by the revelation that several shell companies had acted as cover for the recently banned Chinese apps with the assistance of professionals. 

The new notification has logically expanded the services provided by professionals covered under the Act, which includes buying and selling any immovable property, management of client money, securities, or other assets, and organization of contributions for the creation, operation, or management of companies.

However, there is optimism that these measures will help curb the menace of shell companies and ensure that only genuine business entities are set up. Indian startup talent is now shifting away from the shady practices of Chinese shell companies towards legitimate business processes that adhere to keeping their books of accounts and registered offices with extra care.

Activities to be covered under PMLA after Amendments 2023

The Ministry of Finance, in exercising its authority under Section 2(1) (sa) (vi), has identified activities that, when performed on behalf of or for another person during business operations, will be considered as activities falling under the scope of the PMLA. 

These activities are outlined as follows:

(a) Acting as a formation agent of companies and limited liability partnerships (LLPs): Formation agents must verify the identity of the people who are forming the company or LLP and obtain information about the source of the funds being used to form the entity.

(b) Acting as a director, secretary, or similar positions concerning companies, LLPs, or other entities: The financial activity of the firm must be known to the directors and secretaries.

(c) Providing registered office, business address, correspondence, or administrative address services: Businesses that provide these services must verify the identity of the companies they are providing services and obtain information about the source of the funds being used to pay for the services.

(d) Acting as a trustee of an express trust or performing equivalent functions for other types of trusts: Trustees must be aware of the trust's financial activities and must report any suspicious activity to the authorities.

(e) Acting as a nominee shareholder for another person: Nominee shareholders must be aware of the identity of the person who is the beneficial owner of the shares.

Final Thoughts

As we move forward, ViTWO believes in strengthening norms on reporting entities and increasing awareness about the importance of preventing money laundering and terrorist financing. 

The PMLA has played a significant role in this regard, and we must continue to support its efforts to create a safer and more transparent business environment in India.

And while there will always be those who attempt to exploit the system for their own gain, the Prevention of Money Laundering Act stands as a reminder that justice will always prevail.

ViTWO has been religiously helping organizations to stand strong against every risk and scale up with robust financial accounting management. The wide range of services under ViTWO’s Virtual CFO services is helping out businesses of various sizes to have their financial health in place. 

One can visit the vitwo.in and sign up for the Free Financial Health Check-up to get detailed insights into where their businesses stand.