Prevention of Money Laundering Act

Basics about Prevention of Money Laundering Act

 

Basics about PMLA

What is Money Laundering?

Money laundering broadly means the conversion or "Laundering" of money that is illegally obtained, so as to make it appear to originate from a legitimate source. It was originally used in the context of terrorist, criminal, smuggling and drug-dealing activities. In a wider context, tax-evaded money is also covered.  As part of the global initiative, a Financial Action Task Force ("FATF") was created to help member countries draw up Anti-Money Laundering ("AML") legislation which would help implement the policies, techniques and counter-measures to combat money laundering.

 

What is the Prevention of Money Laundering Act?

In India, The Prevention of Money Laundering Act, 2002 ("PMLA") was created under the aegis of FATF. The PMLA forms the core of the legal framework put in place by India to combat money laundering to be followed by banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc.

 

What is KYC?

KYC is an acronym for "Know your Client" or "Know your Client," a term commonly used for Client Identification Process. Pursuant to PMLA, SEBI has prescribed the certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries (such as Mutual Funds) to 'know' their clients. This could be in the form of personal meetings or verification of identity and address, financial status, occupation and such other personal information. Many companies who do not have face-to-face transacting (such as Mutual Funds) employ the verification route. The underlying principle is to follow the principles enshrined in the PMLA as well as the SEBI Act, 1992 so that the intermediary is aware of the clients on whose behalf it is dealing.

 

What is FIU?

The Government of India set up Financial Intelligence Unit India (FIU-IND) on 18th November 2004 as an independent body to report directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

 

FIU-IND has been established as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence and enforcement agencies in pursuing the global efforts against money laundering and related crimes.

 

Why am I asked to prove my identity, if I have done no wrong?

As has been discovered in some recent terrorist acts such as the 9/11 bombings in New York or the attack on our Parliament in Delhi, white collared crime has arrived. Seemingly, innocent people have been involved. It is also observed that had the checks, as now proposed by the PMLA, been in place, the detection or even pre-emption of the crime could have been possible. In this context, you will appreciate that by providing your identity / address proof and information about your occupation and financial status will only help the Government in isolating the few who are involved in money laundering.

 

All this seems quite scary. Do I need to take any precautions?

Yes. You should be prudent in your money matters, just as you are in following some rules such as say not carrying unknown articles from unknown persons when you are traveling across cities. You should not receive or pay money on behalf of others, unless it is for a genuine transaction in which you have participated. You should also take care that you do deal with known individuals or companies, which are registered with or regulated by SEBI, RBI, etc for all financial or large-value transactions. Please also ensure that you fill out forms completely and strike out any portions, which you do not use, or need.

 

How does it affect a Mutual Fund Investor

Are Mutual Fund Investors also covered by PMLA?

Yes, the PMLA covers all Financial Intermediaries, and this includes Mutual Funds. As such, all Investors are required to submit necessary documentation that will help the Mutual Funds to complete the KYC procedure.

 

What are the KYC requirements for a Mutual Fund Investor?

An Individual investor will have to produce his proof-of-identity and proof-of-address as laid down by SEBI / AMFI to fulfill the KYC process. (This process is covered in subsequent questions below).

 

Non-Individual Investors will have to produce certain documents pertaining to its registration, etc. to fulfill the KYC process.

 

Does the investor have to approach every Mutual Fund separately to fulfill these requirements?

In order to make it convenient to investors, all Mutual Funds have come together to provide a single-point of completing the KYC process.

  

Categories: Mutual Funds