Answer: Money laundering is the process of hiding the source of money obtained from illegal sources and converting it to a clean source, thereby avoiding prosecution, conviction, and confiscation of the criminal funds. It is an illegal exercise that converts black money into white money.

Money Laundering is a lifeline to organized crime operations around the world in the following ways:

• Terror financing: Money obtained from illicit sources are laundered and used in terror financing. Mumbai blast 1993 was a classic example of money laundering as well as organized crime.
• Drug Trafficking: The large sums of money generated by drug trafficking are often illegal and must be laundered to make them appear legitimate. E.g.: Drug profits moving through the U.S. financial system are estimated to be as high as $100 billion a year. The illicit drug trade fuels Canada's organized crime problem which is fueled by money obtained from illegal sources.
• Insurgency in North-East: In India also money earned through drug trafficking through Golden Triangle used in fueling insurgency in NE region.
• Affecting national security and prosperity: Large volumes of criminal money flowing through the countries threatens national security and prosperity, and undermines the integrity of the nation’s financial system.

New provisions introduced in Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023:

The government has amended money laundering rules to incorporate more disclosures for non-governmental organizations by reporting entities like financial institutions, banking companies or intermediaries.

• Widening scope for KYC norms: It has widened the scope of Know your Customer (KYC) norms to include Politically Exposed Persons (PEPs), non-profit organizations (NPOs) and those dealing in virtual digital assets (VDA) as reporting entities.
• Politically Exposed Persons: It has  defined “Politically Exposed Persons” as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers.
• Provision for beneficial owner: The lowering of ownership threshold from the previous 25% to 10%, thereby treating any individual or group holding 10% ownership in a reporting entity as a “beneficial owner” for the purpose of PMLA rules.
• Cryptocurrency and virtual digital assets (VDAs): The new rules have brought crypto currency and VDAs under the ambit of anti-money laundering law (AML).
• Registration on Darpan portal: Reporting entities are now required to register details of the client if it’s a non-profit organization on the DARPAN portal of NITI Aayog

Positive aspects of recent changes:

• Uniformity with RBI circular: The move to define politically exposed persons under PMLA is to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms.
• Ensuring more indirect participation: Beneficial owners' share in shares or capital or profit of the company has been reduced from 25% to 10% to ensure more indirect participants within the reporting net.
• Fulfillment of regulatory obligations : Registering with details of clients on DARPAN portal will ensure some repository of basic information on all NGOs in the Darpan portal of NITI Aayog.
• Better identification of high-risk clients: By requiring more detailed information from clients during the due diligence process, financial institutions can better identify high-risk clients involved in money laundering.
• It will ensure compliance from Crypto and other digital assets service providers.

Effective measures against money laundering require a combination of legal, regulatory, technological, and collaborative efforts to identify and deter illicit financial activities, preserve the integrity of the financial system, and prevent criminal enterprises from profiting from their actions. The Amendment Rules bring about crucial changes that reinforce anti-money laundering efforts in India by providing more clarity on definitions and documentation requirements.