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.