The Ministry of Finance notified the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023 on March 7, 2023, making regulatory scrutiny under the Prevention of Money Laundering Act, 2002 [“PMLA”] more stringent. The PMLA, passed in line with the Financial Action Task Force recommendations, aims to prevent and penalise money laundering. Besides individuals, the money laundering laws are also applicable to companies (including Section 8 companies), partnership firms, unincorporated organisations, and trusts. Under the Prevention of Money Laundering (Maintenance of Records) Rules 2005 [“Rules”], reporting entities such as banks and financial institutions are required to maintain records of all transactions involving receipts by non-profit organisations [“NPOs”] exceeding ten lakhs or its foreign currency equivalent, and furnish such information to its director designated for this purpose. The new amendments widen the scope of the rules, and among other things, demands stronger reporting requirements from NPOs.
With the new amendment to the Rules, entities or organisations constituted for religious or charitable purposes referred to in Section 2 (15) of the Income-tax Act, 1961, including trusts, societies and Section 8 companies, have also been brought under the ambit of the money laundering laws.
2. Reporting entities to register details of NPOs: Reporting entities are mandated to register the details of NPOs on the DARPAN Portal and maintain registration records for five years after the business relationship between the non profit and the reporting entity has ended or the account has been closed, whichever is later. This means that NPOs which are not yet registered on the DARPAN Portal would need to get themselves registered.
3. Changes to the definition of beneficial owners: The Rules require reporting entities to determine whether the clients, which include NPOs, are acting on behalf of beneficial owners, and to identify and verify the identity of such beneficial owners. Prior to the amendment, beneficial owners referred to person/s, who acting alone or together, held ownership of more than 25% of shares/ capital in case of incorporated companies and 15% of properties/ capital/ profits in case of unincorporated associations. While the threshold for the latter remains unchanged, for incorporated companies, the threshold has been reduced to 15%. This is in line with the existing threshold under the Companies Act, 2013. For trusts, the beneficial ownership threshold has been lowered from 15% to 10% of beneficiary interest in the trust.
4. Additional disclosure requirements: The Rules require the clients of reporting entities to submit certified copies of certain documents to them. The amendments have made additions to the list of documents required to be furnished. The below details documents that need to be submitted by NPOs:
Type of Entity: Company
Certified copies required pre-amendment:
(i) certificate of incorporation;
(ii) Memorandum and Articles of Association;
(iii) Permanent Account Number of the company;
(iv) a resolution from the Board of Directors and power of attorney granted to its managers, officers or employees, as the case may be, to transact on its behalf 26[and];
(v) other such documents relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on the company's behalf.
Additional requirements under the new amendment:
(i) the names of all the partners;
(ii) address of the registered office, of its business, if it is different.
Type of Entity: Trust
Certified copies required pre-amendment:
(i) registration certificate;
(ii) trust deed;
(iii) Permanent Account Number or Form No. 60 of the trust;
(iv) other such documents relating to beneficial owners, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf.
Additional requirements under the new amendment: list of trustees and documents as are required for individuals under Rule 9 sub-rule (4) for those discharging their role as trustee and authorised to transact on behalf of the trust.
5. Updating of information: Any update to the documents provided to the reporting entity is now required to be updated to such entity within thirty days.
Thus, NPOs can expect a slew of requests from reporting entities to submit the documentation that the PMLA law makes mandatory for the reporting entities to collect, report and maintain.