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Prevention of Money Laundering Act

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Last Updated on June 28, 2023 by Kanakkupillai

Introduction

The Prevention of Money Laundering Act (PMLA) is a legal framework applicable to various entities operating in India, including companies, non-governmental organizations (NGOs), foreign investors, trusts, and more. The objective of the PMLA is to combat the illicit flow of money and prevent the conversion of illegally obtained funds into legitimate assets.

Over time, the PMLA has undergone several amendments to strengthen its effectiveness and address evolving challenges in money laundering. It is essential for business owners and foreign entities operating in India to stay informed about these changes to ensure compliance with the law and avoid potential legal consequences.

Entities Subject to AML Compliance in India 2023

The recent amendment made by the central government to Section 2 of the PMLA Act expanded the scope of entities subject to Anti Money Laundering (AML) compliance. The following entities are now required to report under the PMLA Act and take necessary actions to prevent money laundering:

  1. Directors and secretaries of companies: Individuals holding positions of directorship or secretaryship within a company are now mandated to comply with AML regulations and actively prevent money laundering activities.
  2. Partners in a firm: Partners within partnerships or corporate firms, such as limited liability partnerships (LLPs), are also included within the purview of the PMLA Act. They are expected to adhere to AML requirements and contribute to combating money laundering activities.
  3. Trustees of express trusts: The amendment extends the application of the PMLA Act to trustees of express trusts. Trustees are now obligated to fulfil AML compliance obligations and implement measures to prevent money laundering within the trust they administer.
  4. Nominee shareholders of the company: Nominee shareholders, who hold shares on behalf of another person or entity, fall within the scope of the PMLA Act. They must adhere to AML regulations and actively work to prevent money laundering activities associated with the shares they hold.

PMLA Act specifies additional activities considered as being conducted on behalf of another person, thereby falling under the act’s scope. These activities include:

a) Acting as a director, secretary, or partner in a partnership, corporate firm, or LLP: Individuals serving as directors, secretaries, or partners within firms are now recognized as engaging in activities on behalf of another person, subjecting them to AML compliance.

b) Acting as a formation agent of companies and LLPs: Formation agents involved in incorporating companies and limited liability partnership firms are now required to adhere to AML regulations and contribute to preventing money laundering activities.

c) Providing a registered office, business address, or administrative office address: Individuals or entities providing services such as registered office addresses, business addresses, or administrative office addresses on behalf of another person are now subject to AML compliance obligations.

d) Acting as a trustee of an express trust or in a similar position for another type of trust: Individuals serving as trustees of express trusts or similar positions in different types of trusts are now included within the scope of the PMLA Act. They must fulfil AML compliance requirements and prevent money laundering activities within the trusts they oversee.

e) Acting as a nominee or shareholder of another person: Individuals acting as nominees or shareholders on behalf of another person or entity fall under the scope of the PMLA Act. They are obligated to adhere to AML regulations and actively prevent money laundering activities associated with the shares they hold.

The Ministry of Finance has amended PMLA Act to further broaden its scope. The latest amendment emphasizes the inclusion of formation agents of companies and limited liability partnership firms. Formation agents are individuals involved in the incorporation process of a company or LLP. However, certain professionals, such as lawyers, are exempted from the purview of the PMLA Act to the extent that their involvement is limited to filing necessary application forms.

Activities Exempted from PMLA

PMLA Act specifies activities that are exempted from the provisions of the act. These activities include:

a) Activities carried out through agreements, leases, subleases, or tenancy agreements prepared for the utilization of a building space: Transactions involving agreements, leases, subleases, or tenancy agreements exclusively for utilizing a building space are exempted from the requirements of the PMLA Act.

b) Activities performed by an employee on behalf of the employer during business: Routine activities carried out by employees on behalf of their employers, within the scope of their employment, are exempted from the provisions of the PMLA Act.

c) Activities carried out by lawyers to the extent of filing necessary forms during company incorporation.

 

G.Durghasree B.A.B.L (Hons)

G Durghasree B.A.B.L (Hons) is a registered trademark attorney with extensive experience as an Advocate for a period of 8 years. She possesses expertise in trademark law, including trademark filing and trademark hearings. Additionally, she is skilled in contract drafting and reviewing, providing legal advice and opinions, particularly in the areas of Company Law, Insolvency and Bankruptcy Code (IBC), and Goods and Service Tax Law (GST). Her experience encompasses both litigation and non-litigation aspects of these laws.