Amendments to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005

The Ministry of Finance through another notification dated 07.03.2023 has amended the

Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (‘Rules’). The amendments are as follows:

Insertion of Rule 3A:

A new Rule 3A has been inserted in the Rules to provide that, at a group level (‘group’ as

defined in the Income-tax Act, 19614), the entities should make policy in order to discharge

the following obligations such as:

(i) Verification of identity of the client and beneficial owners;

(ii) Maintenance of records;

(iii) Furnishing of information to the designated authority;

(iv) Carrying out enhanced due diligence in case of specified transactions.

A new definition of ‘non-profit organization’

The notification also amends the definition of a non-profit organization. The erstwhile

definition read as follows:

“non profit organization” means any entity or organisation that is registered as a trust or a

society under the Societies Registration Act, 1860 (21 of 1860) or any similar State legislation

or a company registered under section 8 of the Companies Act, 2013 (18 of 2013).

The substituted definition of “non-profit organization” reads as follows:

“Non-profit organization” means any entity or organization, constituted for religious or

charitable purposes referred to in clause (15) of section 2 of the Income-tax Act, 1961 (43 of

1961), that is registered as a trust or a society under the Societies Registration Act, 1860 (21

of 1860) or any similar State legislation or a Company registered under the section 8 of the

Companies Act, 2013 (18 of 2013).

Politically Exposed Persons

A new phrase has also been introduced in the Rules vide the notification- “Politically Exposed

Persons”.

The term has been defined as individuals who have been entrusted with prominent public

functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned

corporations and important political party officials.

Threshold lowered for determining beneficial owner

Under the Rules, every reporting entity at the time of commencement of a client relationship

is required to carry out due diligence with respect to the identity of its client, obtain information on the purpose and intended nature of the business relationship.

A reporting entity is also required to determine at the onset of such relationship whether its

client is acting on behalf of a beneficial owner.

In case where the client of a reporting entity is a company, the beneficial owner of such a

company shall be a natural person, who either on his own or together or through one or more

juridical person has a ‘controlling ownership interest’.

Through the notification the threshold for determining the ‘Controlling Ownership Interest’ in

case of a company has been lowered to now provide that ownership of or entitlement to more

than 10% of shares or capital or profits of a company will be considered as having controlling

ownership interest.

Further, in case of Trust, the test for determining the beneficial owner has been lowered from

15% to 10% or more interest in such Trust.

Additional obligation on Clients

The Clients (which are companies), will now also be required to furnish the following additional information to a reporting entity:

i. the names of the relevant persons holding senior management position; and

ii. the registered office and the principal place of its business, if it is different.

In case the Client is a partnership firm, the additional information required to be submitted to

the reporting entity shall be the names of all the partners and address of the registered office,

and the principal place of its business, if it is different.

In case of a Trust, the additional information required to be submitted to the reporting entity

shall be as follows:

i. the names of the beneficiaries, trustees, settlor and authors of the trust and the

address of the registered office of the trust; and

ii. list of trustees and documents as are required for individuals under sub-rule (4) for those discharging role as trustee and authorised to transact on behalf of the trust.

A new sub-rule 9(B) has also been inserted which provides that where any document has

been submitted by a Client as a part of due diligence to a reporting entity and there is any

change in such document, then the updated document shall be shared with such reporting

entity within a period of 30 days of such updation.

Our Comments

The amendment to the Rules will require the entities to have a robust internal infrastructure to

carry out the necessary compliances.

It needs to be borne in mind that the amendments are not merely cosmetic but are substantial

in nature. The same is apparent when one reads through the substantial compliances that are

required to be carried out by entities in terms of due diligence, KYC, maintenance of records

etc. Additionally, the clients of reporting entities will now be required to submit additional

information to such reporting entities.

Lowering the threshold for determining the beneficial ownership has perhaps been done to

align it with the threshold set out under the Companies Act, 2013, however this would

additionally benefit the Government as it would become privy to a wider set of information.

Therefore, the entities on which the amendments are going to be applicable should move

forward with caution and ensure that necessary systems are in place and the compliances

have been carried out.