1. Introduction

To curb money laundering various steps have been taken at an international level as money laundering on most occasions involves a complex chain of transactions which a number of times crosses the territorial boundaries of a country. To crack such complex chains, the support and coordination of different nations is essential. The Financial Action Task Force (FATF) was formed in 1989 for the first time by the G7 summit in Paris to tackle money laundering problem. The Task Force was formed to study money laundering trends, monitor financial legislations/ law enforcement decisions taken on a national and internation level, report on complainces and suggest ways to combat the menace. It initially comprised of 16 members however today the member count stands at 40 with 38 member jurisdictions and 2 regional organisations. All these members through their own laws, procedures and rules are obligated to maintain financial records of individuals through reporting entities like banking companies, intermediaries etc among other obligations. India being a member performed her part by inserting, Section 11A of the Prevention of Money Laundering Act, 2002 (hereinafter referred to as the Act) by Act 14 of 2019 to carve out an obligation upon reporting entites to verify the identity of its clients or/and beneficial owners so that such entities always have a record of the financial transactions along with the identity of the person performing them or the person in whose favor the transaction has been performed i.e the beneficial owner. The purpose is to have a record of such transactions to enable the various law enforcement agencies to unearth complex chains of transactions once they become suspicious of offences committed under the Act. Since such a provision has come into effect as a result of international discussions/meetings the coordination between nations and awareness of the issue stands improved and is further growing.

2. Reporting Entity

Every reporting entity i.e. a banking company, financial institution, intermediary, or any person carrying on a designated business or profession as defined in section 2(1)(sa) of the Act has an obligation to verify the identity of its clients and that of the beneficial owner. According to section 2(1)(sa) of the Act a person carrying on a designated business or profession includes persons carrying on activities for playing games of chance for cash or kind like casinos, Inspector- General of Registration appointed under section 3 of the Registration Act, 1908 subject to such notification passed by the Central Government, real estate agents notified by the Central Government for such purposes, dealers in precious metals, precious stones and other high value goods notified by the Central Government and persons engaged in safekeeping and administration of cash and liquid securities on behalf of other persons notified by the Central Government. These are the few persons carrying on designated businesses or profession within the meaning of section 2(1)(sa) of the Act but is not an exhaustive list of such persons. The Central Government may include other persons/ entities carrying on other activites within the the meaning of “a person carrying on a designated business or profession” or “reporting entity” in accordance with the changing scenarios/ scope of money laundering on the national or international front.

3. Methods of Verification

To verify the identity of the client or the beneficial owner the reporting entity provides certain options to them and they then may opt for any one of the methods provided. The Central Government of India has provided four methods to the reporting entities to be made available to the client or beneficial owner to verify his/ her identity. They are as follows-

A) Authentication under the Aadhar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act , 2016 (hereinafter referred to as the Aadhar Act) (18 of 2016) if the reporting entity is a banking company-

The reporting entity in this process verifies the identity of a client or beneficial owner by taking the aadhar number of that person and sending it to the Central Identities Data Repository (CIDR) for verification. The CIDR then verifies and authenticates the correctness or lack thereof on the basis of the information available with it.

B) Offline verification under the Aadhar Act-

In offline verification instead of sending details to the CIDR, the physical aadhar card or e-aadhar as approved by the Central Government is provided by the client or beneficial owner to the reporting entitiy. The entity then reads the QR Code provided on the aadhar card through a QR Code reader and matches the digital signatures and other details as mentioned in the aadhar card. This method is completely offline and no informtion of the client or the beneficial owner is sent to the Unique Identification Authority of India (UIDAI) making the process completely private. Sub-section 4 of section 11A of the Act ensures further privacy through offline verification as neither the biometric information nor the Aadhar number of the concerned person is stored in this process.

C) Use of passport undersection 4 of the Passports Act, 1967 (15 of 1967)-

This process of verification of indentity of a person is usually opted for by a peron when he/she does not have any other proof of identity to provide to a reporting entity. A passport of a person is accepted as a valid proof to verify and authenticate the identity of a person whether it be an ordinary, official or diplomatic one.

D) Use of any other officially valid document or modes of identification as may be notified by the Central Government in this behalf-

Any other officially valid document that may be able to verfiy the identity of a person may also be used for verification subjet to approval by means of a notification by the Central Government.

4. Authors Comments

In the process of performing obligations of verifying the identities of clients and beneficial owners the reporting entities under section 12 of the Act also get bound to maintain reocords of such transactions. For instance, a person goes to a bank and fills in a form to open an account. Before the account is opened, the identity of the person opening the account is verfified and once that process is complete among other formalities the account of a person is allowed to operate. Once the account is operational a record of all the transactions that one performs is maintained by the bank mostly by way of electronic statements. The Director has been empowered in this behalf through the Act to call for any such records maintained by a reporting entity and on doing so such entity has to mandatorily provide the records that have been called for. If in case the reporting entity fails to send the same then a minimum fine of ten thousand rupees and a maximium fine of one lac rupees under section 13 of the Act may be imposed on such an entity for each failure however these entities under section 14 of the Act are immune from any civil or criminal liablity apart from a fine for non compliance of a direction to provide the records called for. The objective of inserting such provisions to maintain records and to impose monetary punishments for not providing such records is to have a birds eye view of the financial transactions taking place through such entities. With the ease of wire transfers comes stricter surveilance of the transactions taking place. Precisely, that is why most black money is kept and dealt with in the form of cash. By inserting section 12AA of the Act due diligence measures have been enhanced when certain high value transactions are performed and before each of such transaction is performed the identity of the individual performing it and/or the person in whose favor the transaction is performed is verified and a record of it is maintained. The purpose of the transaction and relationship of the individuals among whom the money is circulated is also recorded and if the reporting entity finds any such transaction to be suspicious then future monitoring of the transactions of such individuals is also increased. The entire data gets stored and a detailed record gets prepared in the process, revealing the identity of the persons performing the financial transactions and in whose favour the transactions are performed. Supposing A takes a bribe from B for performing certain tasks and in this process the B electronically transfers a sum of one lac rupees into the account of A. Now, the reporting entity has a record of the transaction creating a proof for prosecution of A as and when his/ her finacial statement/ transactions come under the scanner of law enforcement agencies for whatsover reasons.