Prevention of Anti-Money Laundering Act (PMLA), 2002: Advanced Compliance & Reporting (Part 2)

Building upon the general framework, this second part details the technical standards for identifying ownership, specific reporting requirements for non-profit entities, and the formal statutory reporting timelines required of Alternative Investment Fund (AIF) Managers.

1. Identification of Ultimate Beneficial Owners (UBO)

A critical requirement under PMLA Rules is the identification of the natural persons who ultimately own or control the investors in an AIF. This process is essential to prevent anonymous or shell entities from being used for money laundering.

Ownership and Control Thresholds

• Companies and Trusts: The Ultimate Beneficial Owner (UBO) must be identified based on an ownership or entitlement and control basis, which is set at a threshold of 25 percent.
• Partnerships and Unincorporated Associations: For investors structured as partnership firms or unincorporated associations of individuals, the UBO must be identified based on an ownership or entitlement basis of 15 percent.
• Continuous Monitoring: Managers and custodians are required to apply enhanced due diligence when expanding business relationships with clients identified as having complex ownership structures.

2. Reporting for Non-Profit Organisations (NPOs)

The PMLA framework imposes specific reporting obligations on transactions involving Non-Profit Organisations (NPOs) to ensure that charitable funds are not diverted for illicit purposes.

Scope of NPO Reporting

• Applicable Entities: Transactions must be reported for investors formed as a society under the Societies Registration Act, 1860, or as a company registered under Section 8 of the Companies Act, 2013.
• KYC Requirements: AIFs must conduct thorough Know Your Customer (KYC) procedures on these NPOs to verify their legal status and the source of their committed capital.

Exclusion of Family Trusts

• Wealth Maintenance vs. NPO: The sources clarify that family trusts are generally established for the maintenance and creation of wealth for specific family beneficiaries.
• Exemption: Such family trusts are not regarded as NPOs under PMLA Rules and are not subject to the specific NPO reporting requirements unless the transaction is flagged as suspicious.

3. Statutory Record Maintenance

Maintaining a clear audit trail is a fundamental obligation for reporting entities under the PMLA.

• Retention Period: Custodians and managers must maintain original KYC records for a minimum period of five years from the date of cessation of transactions with the investor.
• Litigation Clause: In instances where litigation is pending, these records must be preserved until the formal completion of the proceedings.
• Accessibility: These records must be readily available to provide a clear history of the rationale for every investment and the identity of the contributors.

4. Advanced Compliance Test Reporting (CTR)

The Compliance Test Report (CTR) is the primary mechanism for the Investment Manager to certify to SEBI that the fund is adhering to all AML and internal control standards.

Submission Timelines and Procedures

• 30-Day Deadline: The manager of a Category III AIF must prepare and submit the CTR within 30 days from the end of the financial year.
• Sponsor/Trustee Review: For funds structured as a Trust, the Sponsor or Trustee must share their observations on the CTR with the Manager within 30 days of receipt.
• Correction Window: The Investment Manager is required to incorporate all necessary changes and finalise the report within 15 days of receiving comments from the Sponsor or Trustee.

Mandatory AML Disclosures in the CTR

The CTR must explicitly confirm the following:

• Whether the AIF has implemented written policies to check for Anti-money Laundering (AML) norms.
• Whether any compliance violations were observed during the year; if so, these must be reported to SEBI at the earliest opportunity.
• Confirmation that Ultimate Beneficial Ownership has been tracked in accordance with the prescribed percentages (25% or 15%).

Key Takeaways for Part 2

Important Terms

• Ultimate Beneficial Owner (UBO): The natural person who ultimately benefits from or controls a legal entity.
• Non-Profit Organisation (NPO): Entities registered for charitable purposes that require specific reporting under PMLA.
• Enhanced Due Diligence: A higher level of scrutiny applied to high-risk or complex investor profiles.
• Compliance Test Report (CTR): An annual certification of the fund's adherence to regulatory and AML norms.

This concludes the two-part short notes for Chapter 17.C on the Prevention of Anti-Money Laundering Act, 2002.