PMLA rules tightened for beneficial owners of partnership firms

Ahead of India’s FATF review, the government has further tightened norms by amending the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 that would bring beneficial owners under tighter monitoring and also ensure stricter compliance of obligations by reporting entities.

The amendments, which were recently notified by the Finance Ministry with immediate effect, include revision in definition of ‘principal officer of a reporting entity’, widening ambit of ‘beneficial owner’ in case of partnership firms, enlarging the list of records required to be maintained physically by the reporting entities.

In a move expected to prevent benami activities, the government has now changed the definition of beneficial owner for partnership firms. Now, persons with 10 per cent shareholding as against the earlier criteria of 15 per cent would be considered beneficial owner of a partnership firm.

Further, a beneficial owner would also be considered a person “who exercises control through other means” where “control” shall include the right to control the management or policy decision”, said the notification by the Finance Ministry.

“This amendment ensures that the beneficial owner will include not only the partners who have ownership of more than ten per cent of the capital or profits of the partnership but also those partners who have ownership of ten per cent or less of the capital or profits of the partnership but exercise control through other means,” said S. Vasudevan, Executive Partner at Lakshmikumaran & Sridharan Attorneys.

The rules require a reporting entity to determine whether a client is acting on behalf of a beneficial owner and also to check the identity of the beneficial owner at the time of commencement of an account-based relationship with such client, he further noted.

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Other amendments to the PMLA Rules include a change in the definition of the ‘principal officer of a reporting entity’, who is responsible for providing information to the Financial Intelligence Unit. According to the notification, the officer “shall be an officer at the management level”. Till now reporting entities could appoint the officer at their own discretion, who could be at any level.

The reporting entity would also be expected to verify the identity of the person authorised to act on behalf of the juridical person and the correctness of such authorization, said Vasudevan. In case the client is a trust, the reporting entity will be required to ensure that trustees disclose their status at the time of commencement of an account-based relationship or when carrying out any transaction of an amount equal to or exceeding Rs 50,000, whether conducted as a single transaction or several transactions that appear to be connected or any international money transfer operations.

Lastly to ensure tighter compliances and monitoring, the reporting entity would also have to maintain records of analysis of transactions by a client and due diligence for a five year period after the end of the business relationship or the closing of the account, whichever is later.

The Financial Action Task Force, which is an inter-governmental international agency to combat money laundering, is scheduled to hold an onsite evaluation of India’s regulations in November this year.  

In preparation for that, the government has been tightening norms under the PMLA in recent months through a series of amendments that include bringing chartered and cost accountants and company secretaries as well as directors of companies, partners of firms, trustees of express trusts and nominee shareholders as “reporting entities”.

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