Brief note on jewellers & Prevention of Money Laundering Act, 2002

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  • The Prevention of Money Laundering Act primarily provides that any person who possesses, acquires, conceals or projects as untainted any proceeds of crime shall be guilty of the offence of money laundering. Further the said Act provides for attachment and confiscation of the property as well as prosecution of the person involved in money laundering.
  • As such the provisions of the Act are universally applicable to every citizen of the country including the jewellers in case they knowingly attempt to or assist in activity connected with the proceeds of crime. In other words, in case a person carrying on the business of precious metals or precious stones as the case may be knowingly indulges into activities prohibited under the Act would become liable to be proceeded against as per the provisions of the Prevention of Money Laundering Act 2002.
  • Although the basic provisions remain unchanged but vide notifications dated 28th December, 2020 dealers in precious metal and precious stone have been notified as “Persons carrying on designated business or profession” in terms of Section 2(1)(sa)(iv) of the Prevention of Money Laundering Act, 2000.
  • The notification also provides that only those dealers of precious metal and precious stones would be treated as designated business or profession in case they engage in any cash transaction with the customer equal to or above Rs. 10 lakhs carried out in a single operation or in several operations that appear to be linked. 
  • As a result of the aforesaid notifications the jewellers covered by the stipulation regarding carrying out cash transactions above Rs. 10 lakhs shall become “Reporting Entities” for the purpose of the Prevention of Money Laundering Act, 2002. The reporting entity under the provisions of the Act is liable to carry out the following compliances:

    1. As per Section 11A of the Act, reporting entity shall verify the identity of its clients through Aadhar, passport or any other officially valid document.
    2. As per Section 12 of the Act, maintain a record of ALL transactions. Further they would have to furnish prescribed information about transactions from time to time to the ED.
    3. They are also required to maintain proper records evidencing identity of their clients along with their account files and business correspondence.
    4. As per Section 12AA of the Act, it is also a duty of the reporting entity to conduct enhanced due diligence prior to entering into any dealing with a client. The reporting entity is required to verify the identity of the client, examine the ownership, financial position of the client along with the sources of funds of the client. The reporting entity shall also record the purpose behind the deal. 
    5. If the reporting entity feels any kind of suspicion towards a certain transaction or deal that has been conducted by a client, then the reporting entity has to ensure that they increase the further scrutiny and monitoring of the client.
    6. The above stated records have to be maintained for a period of 5 years from the date of transaction with the client.

  • Besides the aforesaid compliances the act has stringent penal consequences for nonadherence to the provisions of the law as briefly outlined hereunder:
    1. As per Section 13 of the Act, the ED may conduct an inquiry with regards to the reporting obligations of a reporting entity and also get the records of the reporting entity audited.
    2. If the ED feels that the reporting entity has failed to comply with the reporting obligations then the following actions can be taken against a reporting entity:

      • Issue a warning in writing. 
      • Direct the reporting entity to comply with specific instructions.
      • Direct the reporting entity to send reports at regular intervals as prescribed. 
      • Impose monetary penalty not less than Rs. 10,000/- and which may extend to Rs. 1,00,000/- for each failure. 

  • There is an existing provision contained in Section 269ST of the Income Tax Act, 1961, which prohibits acceptance of cash exceeding Rs. 2 lakhs from any customer. Any person contravening the provisions of the said Section 269ST of the Income Tax Act, 1961, shall be liable for penalty which would be equal to the amount of cash accepted against goods or services exceeding Rs. 2 lakhs from the person. As a result, prima facie it would appear that no jeweller would be accepting cash equal to or above Rs. 10 lakhs from a customer as a result he will not be hit by the notification issued under the Prevention of Money Laundering Act, 2002. However there may be a case where a jeweller may accept cash from a customer over a period exceeding Rs. 10 lakhs on account of multiple transactions. In such a situation he may be compliant with the provisions of Section 269ST of Income Tax Act, 1961, but even then the reporting requirements under the provisions of the Prevention of Money Laundering Act, 2002 will become applicable in such a situation.

  • There are a number of other issues and challenges which the jewellers are going to face as a result of the notification issued under the provisions of the Prevention of Money Laundering Act, 2002. The said challenges are being discussed in a separate note.





By Adv. Devvrath Arora
devvratharora@gmail.com

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