Partnership Firm & Trust – Money-laundering – Client due diligence

Partnership Firm & Trust Vs. Money-laundering – “Client due diligence” – Comprehensive amendment to the Definition of “beneficial owner”

“money laundering” has become an illegal tool, over a period of years, to use illicit funds for terrorism and drug trafficking all over the world.   As a result, controlling and if not elimination, of money laundering has become the daunting task before the country and law framers since long.

It has, therefore, become essential to identify the clients of the banking companies, financial institutions and also intermediaries.

The first salutary step was when the Act of 2002 and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, were framed for various purposes including disclosure of “transaction” of purchase, sale, loan, pledge, gift, transfer, deposits, etc; by the reporting entity to elicit identity of the clients and to ascertain money laundering.   In other words, the reporting entity is put under statutory obligation of “client due diligence” to disclose such details to the  Authority.

Rule 9 of the Rules of 2005 provide for client due diligence, identifying clients, obtain information on purpose and intended nature of the business relationship. 

Rule (9)(ii) provides that every reporting authority shall identify the beneficial owner and take all steps to identify such beneficial owner.

Sub-rule (7) in respect of a partnership firm and sub-rule (8) in respect of Trust provide for giving documents including in respect of beneficial owner.

Sub-rule (3)(b) of Rule 9 defined “beneficial owner” who has more than 15% capital or profits of partnership. 

Now by the amendment of 2023, the partner having 10% capital or profits or less than 10% capital or profits OR who exercises control on management or policy decisions in a partnership firm is now “beneficial owner”

In respect of Trust,  the proviso to sub-rule 10 in Rule 9 of the 2005 Rules is added that the reporting entity shall ensure that trustees disclose their status of commencement of an account based relationship or when carrying out transactions.

Notification No.GSR.652€ dated 4.9.2023 of the Ministry of Finance published in the Gazette