Understanding PMLA 2.0: Key Changes and Implications for Businesses

INTRODUCTION     

What should one do if the key of their vault’s lock falls into the hands of a thief? That is the dilemma the government faces as the financial crime syndicate kept finding lacunae in the Anti-money laundering laws. So the government introduced Prevention of Money Laundering Act (PMLA) 2.0 which are a set of amendments made to the existing law. Every amendment made by the government is like adding another lock to an already fortified vault. These reforms have brought enterprises in high risk sectors like real estate, financial services and crypto-assets under more stringent requirements and pose more intricate legal impediments. The key changes made in PMLA 2.0 and its impact on both domestic and foreign enterprises are examined in this article.

PMLA's BACKGROUND & OBJECTIVE

The Prevention of Money Laundering Act, 2002 (PMLA) is India's primary legislative tool for maintaining the integrity of the financial system and preventing the legalization of illicit proceeds. The primary objective of the law is to put an end on money laundering by implementing strict regulations. It aims to do so by empowering government officials to use instruments such as asset attachment, seizure, and confiscation of property acquired illegally for identifying and investigating financial crime. The Act places robust reporting and record-keeping requirements on banks, financial institutions, intermediaries, and other designated businesses or professions. These entities should provide Not only confirm the identities of their clients but also provide their Financial Intelligence Unit (FIU-IND) with the information that is required. Since its inception the Act has undergone various revisions in order to expand its application and align with evolving international standards. All of these modifications have helped to ensure that the Act remains an essential deterrent against illegal financial flows in India.

KEY CHANGES INTRODUCED IN PMLA 2.0

1.      Expansion of the Beneficial Ownership Definition

In the most recent amendments to Prevention of Money Laundering Act (PMLA) the lawmakers have vastly expanded the criteria for a person who shall be recognized as beneficial owner. Previously any individual who controlled more than 25% of a client of a reporting entity (such as banks and other financial institution) was identified as a beneficial owner. But now the same threshold has been reduced from 25% to 10%. This change brings oversight on layered, indirect and small ownership of shares which previously were held unaccountable under purview of the Act. By doing this the law makers have greatly broaden the scope of compliance and due diligence obligations[1]. In addition to bringing the Indian regulations closer to the international standards such as those recommended by the Financial Action Task Force (FATF), this change has also addressed the increasing complexity of modern corporate structures, where complex and ambiguous arrangements can be used to exert control.

2.      Expanding the Scope to Non-profit Organizations

The amendment made to Prevention of Money Laundering Act in the year 2023 has extended its scope to now include Non-Governmental Organizations (NGOs) and other Non-Profit Organizations (NPOs) under its purview. These organizations shall include trusts, societies, and Section 8 companies which were often founded for charitable or religious reasons. They are now subject to stringent reporting and due diligence requirements under the new laws. Records of such organization shall also be retained by reporting organizations for five years after the business relationship ends or the account is closed[2]. These organizations shall also provide a detailed disclosure regarding their senior management, operational facilities, and beneficial owners in order to encourage greater transparency and risk assessment.

3.      Inclusion of Virtual Digital Assets.

The Prevention of Money Laundering Act had no way to prevent transfer of illicit money through Virtual Digital Assets (VDAs) as the act was enacted in 2002, prior to the widespread use of crypto-assets. Thus through new amendment made in the year 2023 the legislature has included intermediaries and service providers dealing with VDAs such as cryptocurrencies under the ambit of the Act. This includes services like exchange of VDAs and fiat currencies, its safekeeping and other services related to VDA. This change will bring regulation to the illicit transfer of money in this sector which is even more essential as there is no specific act guiding such VDAs in India.

IMPACT ON BUSINESS OPERATIONS

1.     Increased Cost of Compliance

The PMLA 2.0 has significantly increased the compliance burden reporting entities as there is a requirement of significant investments in updated systems, staff training and ongoing complain monitoring. The scope of the statute was expanded in such a way that it now includes non-profit organizations, intermediaries and service providers of VDAs and other professional services providers such as real estate agents, cost and works accountants (CWAs), company secretaries (CSs), chartered accountants (CAs), and other practicing professionals. These entities and professionals are now subject to strict record-keeping and reporting requirements in addition to banks and financial institutions[3].

2.     Foreign Investment and Foreign Direct Investment

Under PMLA 2.0 all Foreign Direct Investment (FDI) transactions in India are now subject to stricter scrutiny. The new amendment mandates strict adherence to regulations through documentation to ensure the genuine origins of funds. Industries like e-commerce and fin-tech among others are severely impacted by this new way of regulatory monitoring due to its stricter due diligence requirements and longer clearance times resulting from in-depth regulatory reviews. The heightened focus on FDI through PMLA 2.0 demonstrates government’s resolve to halt illicit financial flows while permitting legitimate foreign investments in the country[4].

3.      Legal Risk and penalties

After amendment made in the year 2018, section 45 of Prevention of Money Laundering Act, 2002 lost its principle of guilty unless proven innocent. But it still retained a reversed burden of proof due to which it is the duty of the accused to prove that he has not made any transactions that shall be considered as money laundering. The new amendments in 2023 levied a hefty penalty of ₹10,000 which may extend up to ₹1,00,000 for non-compliance by reporting entities. With a reversed burden of proof this may be cost intensive.

RECOMMENDATIONS

1.     Strengthen Internal Compliance Frameworks

PMLA 2.0 calls for the strengthening of internal compliance frameworks in order to effectively prevent money laundering and adhere to legal obligations. So business entities shall develop comprehensive AML compliance policies that fit their risk profiles and cover crucial subjects like record-keeping, transaction monitoring, customer due diligence (CDD). This will help them quickly locate and disclose activities that are suspicious in nature. This policies should not only be approved and implemented by board or senior management but it should also be communicated clearly at all organizational levels to ensure awareness and accountability.

2.     Enhance Beneficial Ownership Identification

In order to identify beneficial owner under PMLA 2.0, reporting entities must have robust procedures in place. They need to offer their staff proper training to accurately identify and validate beneficial owners who hold ownership or control of more than 10%. These staff members should be capable enough to identify that even though a person who does not own more that 10% of the client, he may still be asserting control over the company through other means and thus he shall be classified as beneficial owner. Beneficial ownership data must be updated and tracked frequently to ensure compliance and promptly document modifications.

3.    Make Use of Technology for Ongoing Monitoring

Businesses should install Advanced AML software systems that automatically processes critical transaction monitoring, client screening, and reporting suspicious activity through the use of sophisticated algorithms. Adopting these technological advancements not only allows entities to proactively detect and mitigate financial crime concerns but also improve their overall regulatory compliance and operational resilience. When a company or professional adopt these technological developments it allows them to proactively detect and remove financial crime concerns while also improving overall regulatory compliance.

CONCLUSION

PMLA 2.0 ushers in a new era of vigilance and accountability for all businesses operating within India’s financial landscape. Even though the reforms are challenging and resource intensive at the end of the day they are essential to fortify economic integrity and restore trust in regulated markets. If the entities embrace this robust compliance frameworks and leverage their advanced technologies they can not only meet legal demands but also strengthen their reputational resilience. When all the stakeholders effected by the Act come together and navigate these stringent mandates as a collective responsibility, only then we can will ensure that legitimate enterprise flourishes while financial crime is decisively curtailed.