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Obligations of NBFCs in terms of prevention of Money Laundering Act, 2002

Manish Tiwary 
on 16 February 2017

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1. NBFCs were advised to appoint a Principal Officer and put in place a system of internal reporting of suspicious transactions and cash transactions of Rs.10 lakh and above. In this connection, Government of India, Ministry of Finance, Department of Revenue, issued a notification dated July 1, 2005 in the Gazette of India, notifying the Rules under the Prevention of Money Laundering Act (PMLA), 2002. In terms of the Rules, the provisions of PMLA, 2002 came into effect from July 1, 2005. Section 12 of the PMLA, 2002 casts certain obligations on the NBFCs in regard to preservation and reporting of customer account information.  

With the enactment of Prevention of Money Laundering (Amendment) Act, 2012 and amendment to Section 13 of the Act which provides for "Powers of Director to impose fine", the section 13(2) now reads as under:

"If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, without prejudice to any other action that may be taken under any other provisions of this Act, he may -

(a) issue a warning in writing; or

(b) direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or

(c) direct such reporting entity or its designated director on the Board or any of its employees, to send reports at such interval as may be prescribed on the measures it is taking; or

(d) by an order, levy a fine on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure."

2. Maintenance of records of transactions- NBFCs should introduce a system of maintaining proper record of transactions prescribed under Rule 3 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules, 2005).

3. Preservation of records- NBFCs should maintain for at least five years from the date of transaction between the NBFC and the client all necessary records of transactions.

4. Reliance on third party due diligence

For the purpose of verifying the identity of customers at the time of commencement of an account-based relationship, NBFCs may rely on a third party subject to the conditions that-

- the NBFC immediately obtains necessary information of such client due diligence carried out by the third party;

- the NBFC takes adequate steps to satisfy itself that copies of identification data and other relevant documentation relating to the client due diligence requirements will be made available from the third party upon request without delay;

- the NBFC is satisfied that such third party is regulated, supervised or monitored for, and has measures in place for compliance with client due diligence and record-keeping requirements in line with the requirements and obligations under the PML Act;

- the third party is not based in a country or jurisdiction assessed as high risk and

- the NBFC is ultimately responsible for client due diligence and undertaking enhanced due diligence measures, as applicable.

5. Reporting to Financial Intelligence Unit-India- NBFCs are required to report information relating to cash and suspicious transactions to the Director, Financial Intelligence Unit India (FIU-IND) at the following address: Director, FIU-IND, Financial Intelligence Unit-India, 6th Floor, Hotel Samrat, Chanakyapuri, New Delhi-110021.

The cash transaction report (CTR) for each month should be submitted to FIU-IND by 15th of the succeeding month. While filing CTR, individual transactions below rupees fifty thousand may not be included. Cash transaction reporting by branches/offices of NBFCs to their Principal Officer should invariably be submitted on monthly basis (not on fortnightly basis) and the Principal Officer, in turn, should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule;

The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature. The Principal Officer should record his reasons for treating any transaction or a series of transactions as suspicious.

6. NBFCs are required to prepare a profile for each customer based on risk categorization. Further, vide paragraph 4 of RBI NBFC circular DNBS (PD). CC 68 /03.10.042/2005-06 dated April 5, 2006, the need for periodical review of risk categorization has been emphasized.

7. NBFCs are required to pay special attention to all complex, unusual large transactions and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background including all documents/office records/memorandums pertaining to such transactions and purpose thereof should, as far as possible, be examined and the findings at branch as well as Principal Officer level should be properly recorded.

8. Government of India vide its Notifications No.13/2009/F.No.6/8/2009-ES dated November 12, 2009, February 12, 2010 and June 16, 2010 amended the Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. NBFCs and RNBCs were advised to study details of notification and the amendments clearly noted and spread across their organisation and to strictly follow the amended provisions of PMLA Rules and ensure meticulous compliance with these Rules.

9. Assessment and Monitoring of Risk- NBFCs were advised to take steps to identify and assess their Money Laundering/ Financial Terrorism risk for customers, countries and geographical areas as also for products/ services/ transactions/ delivery channels. NBFCs should have policies, controls and procedures, duly approved by their boards, in place to effectively manage and mitigate their risk, adopting a risk-based approach.


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