In furtherance of its continued endeavors to monitor the activities of non-profit organizations (NGOs) in India, the Government has specifically introduced certain amendments to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”).
The PMLA Rules, which were introduced to regulate, inter alia, maintenance of records of the nature and value of transactions and verification of records pertaining to the identity of the clients of banking companies, financial institutions and intermediaries, have been recently amended by the Government pursuant to the Prevention of Money-laundering (Maintenance of Records) Amendment Rules, 2023 (“2023 Amendment Rules”) to include, amongst others, certain compliances/ changes that may impact NGOs.
We have analysed below the amendments introduced with the 2023 Amendment Rules relevant to NGOs and the implications of said amendments:
i) Definition of NGOs: The definition of “non-profit organization” has been revised to mean any entity or organization, constituted for religious or charitable purposes referred to in clause (15) of section 2 of the Income-tax Act, 1961, that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a Company registered under the section 8 of the Companies Act, 2013.
As a result of specific inclusion of reference to Section 2(15) of the Income-tax Act, 1961 in the definition of “non-profit organization”, the Government appears to have clarified and emphasized that the compliances in respect of NGOs prescribed under the PMLA Rules are intended to be applied to all organizations/ entities that have been constituted for religious and charitable purposes and could be eligible to claim tax benefits/ exemptions as per the applicable provisions of the Income-tax Act, 1961. Consequently, trusts and societies primarily engaged in for-profit activities would now be excluded from the definition of “non-profit organization” for the purposes of PMLA Rules.
ii.) NGOs Registration: Banking companies, financial institutions and their intermediaries are now required to register the details of their NGO clients on the DARPAN portal of NITI Aayog and maintain such registration records for a period of five years after the business relationship with such client ends or the account has been closed, whichever is later.
The DARPAN portal is a State/ Sector wise repository of information in respect of, inter alia, NGOs and registration on DARPAN portal was earlier voluntary. However, NGOs would now need to mandatorily be registered on the DARPAN portal and this would allow all relevant information in respect of the NGOs to be easily accessible through a centralized database. Also, onus of ensuring such registration on DARPAN portal has now been placed on banks and financial institutions handling financial transactions of NGOs.
iii.) Additional Submissions: In order to enable reporting entity to, inter alia, verify identity of the client and its beneficial owner, the client is, depending on whether the client is established as a company, partnership firm or trust, is now additionally required to submit to the reporting entity, inter alia, names of partners/ trustees/ persons holding senior management positions along with details of registered office and principal place of its business as part of KYC information and update such information within 30 days of any change therein.
The present amendment appears to be aligned with similar KYC requirements recently included in the Foreign Contribution (Regulation) Act, 2010 (“FCRA”) pursuant to the Foreign Contribution (Regulation) Amendment Act, 2020, in terms whereof applicants seeking prior permission or registration under FCRA or renewal of registration under FCRA are now required to provide Aadhaar number or passport/ overseas citizen of India card (in case of non-residents) of all its office bearers or directors or other key functionaries. The relevant amendments to FCRA introduced through the Foreign Contribution (Regulation) Amendment Act, 2020 and the decision of the Supreme Court in Noel Harper & Ors. vs. Union of India & Anr. (Writ Petition (Civil) No. 566 of 2021 upholding the validity of the same were analyzed by us in our previous article in this series that can be accessed on this portal.
iv.) Beneficial Owner: The threshold for determination of beneficial owner in respect of a client has been lowered. As per the 2023 Amendment Rules, any natural person holding more than 10% of the share capital or profits (in case of the company, in respect whereof the threshold was 25% earlier) and any author of the trust, the trustee and/ or the beneficiaries with 10% or more interest (in case of a trust, in respect whereof the threshold was 15% earlier), will be treated as a beneficial owner.
The lower threshold for identifying beneficial owner in respect of the companies appears to be undertaken for alignment with similar threshold prescribed under the Companies Act, 2013 with respect to significant beneficial owners. In order to facilitate identification of the beneficial owners by reporting entities, NGOs would now have to submit details of all such persons who may qualify to be beneficial owners pursuant to the aforesaid amendment.
As per the PMLA Rules, all details received in respect of the clients are required to be filed in electronic form with the Central KYC Records Registry by the concerned reporting entities. Consequently, details of all persons who would now be identified as beneficial owners and senior personnel of NGOs pursuant to 2023 Amendment Rules would also be available in the Central KYC Records Registry.
There have been several instances of proceedings being initiated against NGOs under FCRA and the Prevention of Money-laundering Act, 2002 (“PMLA”) for alleged irregularities in foreign grant utilization and other FCRA violations, including attachment of assets of certain NGOs by the Enforcement Directorate and registration of FIR by CBI. Furthermore, as per recent reports, six of every ten NGOs audited by the Ministry of Home Affairs between June, 2019 and April, 2022 were found to have committed compoundable offences under FCRA and the Government has cancelled licenses of 1,816 NGOs during the same period.
Further, any non-compliance of the requirements introduced through the 2023 Amendment Rules would also amount to an offence under PMLA, and in this context it is relevant to take note of the following provisions under PMLA that deal with burden of proof and criteria for bail:
- Section 45 of PMLA sets out the following two conditions for grant of bail: (a) there are reasonable grounds for believing that the accused is not guilty of such offence; and (b) he/ she is not likely to commit any offence while on bail; and
- Section 24 of PMLA places the burden on accused person to prove that proceeds of crime are untainted property.
The Supreme Court, while deciding on a batch of matters challenging validity of certain provisions of PMLA and relating to, inter alia, appeals against orders denying bail/ quashing of proceedings, upheld the validity of, inter alia, aforesaid provisions of PMLA in its judgment dated July 27, 2022 in the matter of Vijay Mandanlal Choudhary & Ors. Vs. Union of India & Ors. (Special Leave Petition (Criminal) No. 4634 of 2014) and other connected matters.
A review petition against the aforesaid ruling of the Supreme Court is currently pending and it may have to be seen if the Supreme Court alters its views and decision in the said proceedings. However, in light of the aforesaid requirements under PMLA as on date, defense of NGOs against PMLA proceedings, if initiated owing to any alleged violation under PMLA, could prove challenging.