Finance Ministry Enhances Beneficial Owner Definitions & Disclosure Rules under PMLA

Introduction

In a recent move to combat benami activities and operations of clandestine firms, The Ministry of Finance recently issued a notification[i], under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 that will be known as the Prevention of Money Laundering (Maintenance of Records) 2nd Amendment Rules, 2023 (‘Rules’). This notification widened the ambit of a beneficial owner in a partnership firm and introduced amendments concerning trustee disclosures.

Primary Amendments 

• The reporting entities are now only permitted to designate individuals at the management level as Principal Officers under r. 2(f) of the Rules. This ensures that only individuals with sufficient authority and oversight handle compliance matters.

• In the case of a partnership firm, according to the amended rules, a natural person holding a stake or with ownership exceeding 10% of the capital or profits of a partnership will now be considered a ‘beneficial owner’ under r. 9(3)(b) of the Rules. Previously, the threshold for determining beneficial ownership in a partnership firm was set at 15% of the partnership’s capital or profits.

• Further, an individual who does not possess ownership or entitlement to more than 10% (earlier 15%) of the partnership’s capital or a profit but exercises the right to control the management or policy decision of the partnership through alternative methods, will come under the ambit of a beneficial owner. This has been done by adding an explanation that clarifies that the term ‘control’ includes the right to control management or policy decisions.

• Additionally, the notification highlights that concerning trusts under r. 9(10) of the Rules, the reporting entities are obligated to ensure that trustees disclose their status at the time of initiation of an account-based relationship or when conducting transactions equivalent to or exceeding Rs. 50,000 or any international money transfer operations as per r. 9(1)(b) of the Rules. This emphasises the importance of trustee disclosures in trust-based relationships to enhance transparency and accountability.

• Under r. 10(3) of the Rules, reporting entities are required to maintain records of clients’ identities, including the outcomes of any analysis conducted as part of client due diligence (under r. 9) or the maintenance of transaction records (under r. 3). Amendments to r. 10 of the Rules expand the scope of the information to be maintained, potentially providing more comprehensive insights into potential money laundering activities.

Analysis

The recent Ministry of Finance notification represents a significant step forward in combatting benami activities and strengthening anti-money laundering efforts. By expanding the definition of beneficial ownership and reinforcing trustee disclosures, these amendments underscore the commitment to financial transparency and accountability.

The responsibility now falls on reporting entities to diligently adhere to these updated guidelines. Their strict compliance will play a pivotal role in safeguarding our financial landscape’s integrity. Effective implementation relies on continued collaboration between regulatory authorities, businesses, and financial professionals.

End Note

[i] The PML (Maintenance of Records) Second Amendment Rules, 2023, Central Government Notification GSR 652(E) dt. 04.09.2023.

Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.