Issues under PMLA for jewellers By Adv. Devvrath Arora

Issues under PMLA for jewellers

• The basic provisions of the prevention of money laundering act, 2002 and the effect of notifications issued on 28th December, 2020 have been discussed in a separate note. Read More Various issues arising in consequences to notifications dated 28th December, 2020 are being discussed here after:

• There are a few issues which arise, namely:

1. Which dealers will be covered by the notification and consequently will become reporting entities under the PMLA?
2. The challenges which such a reporting entity will face.
3. What will be the consequences if any unaccounted cash/ undisclosed inventory found in the possession of any such dealer?

• The notification dated 28 December, 2020 covers the following dealers:

• Dealers in precious metals, precious stones if they engage in any cash transaction with a customer equal to or above Rs. 10 lakhs, either in a single operation or in several operations that seem to be linked. 

• The first question which arises here is that which dealers would be covered by this notification. Whether a dealer of jewellery would also be covered by the aforesaid notification, because technically precious metals and precious stones are commercially different items vis-à-vis a jewellery made of precious metals and precious stones. The precious metals and precious stones are the basic ingredients and form raw material for making of jewellery but the same becomes commercially a different product as compared to the raw material which has been consumed in creating such jewellery.

• Secondly not all dealers of precious metals and stones have been covered by the notification. Only dealers who engage in cash transactions equal to or above Rs. 10 lakhs carried out in a single operation or several operations which appear to be linked have been notified for the purpose of section 2(1)(sa)(iv) of the Prevention of Money Laundering Act, 2002. In other words, technically speaking a dealer who does not engage in cash transactions exceeding Rs. 10 lakhs with one customer whether in a single operation or in several operations which appear to be linked shall not be covered by Section 2(1)(sa)(iv) of the Prevention of Money Laundering Act, 2002.

• Another issue which arises is how a single operation or several operations which appear to be linked will be construed for the purpose of identifying the dealers as per this notification. In case separate bills are issued in the names of various family members for pieces of jewellery which reflect several separate operations or transactions as the case may be, for the purpose of the Prevention of Money Laundering Act, 2002 such transactions can be linked as one transaction resulting in receiving cash of more than Rs. 10 lakhs as referred to in the notification.

• Further it has not been provided in the notification that once a dealer has been discovered having any transaction or linked transactions as referred to hereinabove of Rs. 10 lakhs or more in cash, then for what period of time would such a dealer continue to be covered under Section 2(1)(sa)(iv) of the Prevention of Money Laundering Act, 2002. In other words, can a single such transaction make a dealer liable for all compliances of reporting entity for all times to come.

• Now a dealer of jewellery can possibly take two stands, firstly that he does not have any cash sale exceeding Rs. 10 lakhs as a result the notification is not applicable to him. Moreover, he can also make an argument that a dealer of jewellery per-se is not covered by the notification as has been briefly discussed herein above. A dealer of precious metal or precious stones cannot possibly take the second argument.

• Alternatively, the dealer can accept being covered by the notification and take necessary steps to ensure compliance as provided in the Act. Briefly the compliance pertains to obtaining verifications/KYC from all customers, information to be filed with ED as may be prescribed, maintenance of records as provided under the act, verification of the financial position of the client along with source of funds of the client etc. It goes without saying that the same possibly would not contribute towards ease of doing business rather work as a constant threat to the dealers of precious stones and precious metals further leaving them open for enquiry from ED besides other departments.

• In the above situation a hurdle that the dealers will face will be that every customer may not be willing to share their personal information with them, which may thus indirectly affect business. How a dealer is expected to understand the source of funds and the financial position of a client is anyone’s guess. Not only that, the dealer in addition is also being expected to maintain a record of the purpose for which the buyer is conducting a transaction, which is unreasonable and unrealistic. Thus leaving such dealers in a position where they are being made watchdogs and are being expected to conduct an enquiry like an investigation agency.

• Incase any agency during a search or survey manages to find some unaccounted cash or undisclosed inventory then the dealer not only exposes himself to tax liability and penalties but now after the notification on 28.12.2020, the threat of being prosecuted under PMLA also looms large, along with possibility of attachment and ultimately confiscation by the Government in the event that the special court comes to the conclusion that proceeds of crime were involved in the disputed property. There are also provisions of imprisonment of 3 to 10 years in case found guilty of money laundering. 

• Thus, as per notification dated 28.12.2020, even though expressly, jewellers are not mentioned in the PMLA, yet it would be safe to assume that the legislator’s intention must have been to include jewellers while mentioning dealers of precious stone and precious metal. Thus, jewellers when covered under the PMLA have been made watch dogs and are expected to even report suspicious activity by any buyer to the ED, putting them in a state of vigil at all times. Therefore jewellers must ensure that they protect themselves from prosecution under the PMLA by doing proper KYC, maintaining records, ensuring that they know the source of funds of their cash and stock. 

By Adv. Devvrath Arora

devvratharora@gmail.com