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Understanding gaming companies' obligations under the Prevention of Money Laundering Act

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Gambling and betting is a business that is traditionally associated with money laundering, tax evasion and use of illicit funds. From Macau to Las Vegas regulators of all jurisdictions where gambling is legal have shown concerns of black money being used in casinos and have imposed Know Your Customer (KYC) and other guidelines. In India, the Goa government amended the casino license conditions and issued guidelines to casinos which included collection of KYC documents, reporting of transactions above Rs. 10 lakhs to the Financial Intelligence Unit (FIU) and maintaining special checks on Politically Exposed Persons (PEPs).

The Supreme Court by its order dated 17th September 2014 in the Mahalakshmi Cultural Association (“rummy for stakes”) case wanted the Central government to give information about implications for online rummy companies under the Prevention of Money Laundering Act, 2002 (PMLA).

It is thus important to know the type of entities liable under the PMLA, mandatory compliances for such companies and penalties for non-compliance.

Type of entities covered under PMLA

In general, any person directly or indirectly involved in any activity or process concerned with the proceeds of crime, i.e use, concealment, possession, acquisition or projection it as untainted property is said to have committed the offence of money laundering under the PMLA. The term “proceeds of crime” is defined as property obtained directly or indirectly as a result of a scheduled criminal activity. The Schedule of the PMLA gives a list of offences which would constitute as ‘criminal activity’ under the Act. Offences pertaining to gambling are not specifically mentioned in the Act.

However the PMLA also requires “reporting entities” to maintain certain types of records and furnish information to the Director of Financial Intelligence Unit (FIU) as and when required.  Reporting entities is defined under Section 2(wa) to include a banking company, financial institution, institution, intermediary or a person carrying on a designated business or profession. Further under Section 2(sa) as amended in 2013, a person carrying out a designated business or profession inter alia  includes “a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino.”

Additionally,  financial institution has been defined to include inter alia those companies defined under Section 45I (c) of the Reserve Bank of India Act  and payment system operators (those companies settling payments between a payer and beneficiary including through credit cards, debit cards, money transfer etc.) Under the RBI Act, financial institutions includes non-banking companies which collect monies under any scheme or arrangement for the purpose of distributing prizes in cash or kind.

Thus under the PMLA potentially all gaming companies including online gaming or skill games websites, lottery operators, casinos, payment gateways etc. are reporting entities and are required to maintain various records and customer identity documents.

Records that have to be maintained by reporting entities under the PMLA and Rules

Section 12 of the PMLA imposes obligations on reporting entities to maintain records of all transactions and provide it to the Director FIU as and when demanded. Further, the reporting entity is also required to maintain a record of documents regarding identity of clients and business correspondence etc. The records have to be maintained for a minimum period of five years from the date of transaction.

Apart from the records to be maintained under Section 12, onerous set of obligations are also imposed on reporting entities under the Prevention of Money Laundering (Maintenance of Records)  Rules, 2005 which inter alia include maintenance of records of all cash transactions or series of inter-connected cash transactions of the value of more than ten lakh rupees, maintenance of records of all suspicious transactions (i.e. transactions that have no economic rationale or bona fide purpose, transactions that may involve proceeds of a Scheduled offence and transactions involving financing of terror-related activities)  and client due diligence.

Client due diligence involves collection of identity of the client at the commencement of an account-based relationship and verification of identity in transactions above fifty thousand rupees.

All records that are maintained by the reporting entity have to be supplied to the Director FIU every month by the 15th day of the succeeding month. Further a monthly report on the measures taken under the PMLA and Rules has to be sent to the FIU by the designated director of the reporting entity by the 10th day of the succeeding month.

Penalty for non-compliance

Section 13 of the PMLA authorises the FIU to call for records of reporting entities and ask for its audit by a Central government auditor and after inquiry issue a warning to a reporting entity, designated director or employee, issue directions for compliance or by an order impose a monetary penalty of not less than ten thousand rupees but up to one lakh rupees.

Jay has researched extensively on gaming laws and has been cited by various media houses and journals as an expert. He has helped leading newspapers in their stories on gaming laws. Jay completed his B.A. LL.B. (Hons.) degree from NUJS, Kolkata in 2015 and is currently based out of Mumbai.

17 Comments

17 Comments

  1. Guest

    June 28, 2015 at 10:34 pm

    Was searching since last few days a particular question. Whether a person who bets on sports online from India or play poker online be will be liable To have committed a scheduled offence under PMLA? I am including online poker as still Supreme Court has not said it is a game of skill

    Your post covers the institution who offer the game but what about the individuals who actually play it?

    What happens if I play poker online on pokerstars or bet online on sports from India ? Will I be said to have committed a scheduled offense under PMLA? Will the earning be termed as proceeds of crime ?

    • Jay Sayta

      June 29, 2015 at 8:25 am

      Betting or playing on an online gambling website would per se not constitute an offence under PMLA unless tainted funds obtained from proceeds of a Scheduled Offence are used for the purpose.

  2. Gaurav

    July 1, 2015 at 1:28 pm

    I want to know if one can place bets on bet365, an online betting website….and then withdraw the winnings through neteller or skrill to my local bank account….and pay 30% tax on that money….then will I be punished under indian laws??

  3. Rupesh

    July 3, 2015 at 3:16 pm

    No. It’s not possible to punish you under current law.

  4. Guest

    July 5, 2015 at 6:58 pm

    As of now remitting of funds for poker/ hobby(betting) etc all is considered illegal under fema. Also section 4 of fema prohibits holding of any foreign currency account of foreign currency . So money held in poker accounts and ewallets will be under section 4 of fema.

    To make matters worse a new section 37-A has been introduced in fema during this budget. It gives ED right to attach property in India for equivalent amount.

    Placing a bet on bet365 you can be punished under public gaming act and information technology act and fema for sure if caught.

  5. Gaurav

    July 6, 2015 at 12:07 am

    What should I do if I don’t want myself to be caught??

  6. Guest

    July 7, 2015 at 7:02 pm

  7. sambhav

    July 9, 2015 at 6:14 pm

    http://www.pokerguru.in/forum/showthread.php?3121-Your-skrill-neteller-entropay-accounts-may-be-reported-to-income-tax-authorities&p=18085#post18085

    just read this article. Just wat to know that i beton bet365 and play poker on pokerstars/ftp/88. I use neteller for depositing/withdrawing/selling. Referring to this article do i need to stop maintaining a neteller acc? or do i completely need to stop online gambling/poker. what options do i have? if my transactions are limited to less than 20k INR even will that be a problem in future. Would require the expertise of Jay Sayta here.
    regards
    sambhav

  8. Gaurav

    July 10, 2015 at 1:41 am

    I have to tell the income tax department about money which I am earning from sports betting and have to pay 60% tax on it….right?and after paying these taxes will I be punished……

  9. Monish

    July 13, 2015 at 12:05 am

    Is it legal to start physical gaming house for games involving skill like rummy…? Thanks a lot in advance.

    • Jay Sayta

      July 13, 2015 at 11:45 am

      Matter pending in Supreme Court. Once SC decides, there will be more clarity on whether real money games of skill can be played for stakes.

  10. Gaurav

    July 14, 2015 at 9:21 pm

    I have to tell the income tax department about money which I am earning from sports betting and have to pay 60% tax on it….right?and after paying these taxes will I be punished……

  11. Guest

    July 16, 2015 at 7:42 pm

    As of now yes you just need to declare to avoid prosecution under fema

    Don’t know what happens with the information collected by the tax department

  12. Monish

    July 18, 2015 at 7:42 pm

    Thanks…Jay…. But there are websites in India…where we can play rummy for stake…and on website its written that it is legal to play games involving skills for stake. Also as per Bombay prevention of gambling act it excluded all provision of act on game of skill. So what is matter panding with SC can I get facts of the case..?

    • Jay Sayta

      July 19, 2015 at 11:32 am

      I have given all the details in a separate post. Pls visit that post on this website.

  13. Monish

    July 19, 2015 at 5:28 pm

    It would be great if you can share link or month and year of that archive. thanks in advance.

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