Prevention of Money Laundering Act, 2002
Important Definitions under Section 2 of the PMLA
The PMLA's definitions fall naturally into two maps. The first concerns the offence and the property: proceeds of crime, the scheduled offence that generates them, the property they consist of, its value and transfer, and its attachment. The second concerns the preventive system: the reporting entities that must know their clients, the categories they fall into, and the client and beneficial owner they must identify. This note explains each definition and how it operates.
The definitions of Section 2 as two connected maps
1. The Offence and the Property
Term | Definition, in substance | Why it matters |
|---|---|---|
Proceeds of crime, s. 2(1)(u) | Property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence, or its value; where such property is taken or held outside the country, property equivalent in value held within the country or abroad. Explanation (2019): includes property derived from any criminal activity relatable to the scheduled offence | The object of laundering, and of attachment and confiscation |
Scheduled offence, s. 2(1)(y) | Offences in Part A of the Schedule; offences in Part B if the total value involved is one crore rupees or more; and offences in Part C | No scheduled offence, no proceeds of crime |
Property, s. 2(1)(v) | Property or assets of every description, corporeal or incorporeal, movable or immovable, tangible or intangible, including deeds and instruments of title, wherever located; the Explanation includes property used in the commission of the offence | Covers cash, land, shares, crypto assets, and assets abroad |
Value, s. 2(1)(zb) | Fair market value on the date of acquisition, or if that cannot be determined, on the date of possession | Fixes the measure for equivalent-value attachment and the Part B threshold |
Transfer, s. 2(1)(za) | Includes sale, purchase, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien | Explains what attachment prohibits |
Attachment, s. 2(1)(d) | Prohibition of transfer, conversion, disposition or movement of property by an order under Chapter III | The property stays with its holder but cannot be dealt with |
§ Proceeds of crime after Vijay Madanlal Choudhary The link to a scheduled offence is essential. Property can be proceeds of crime only if it is derived from criminal activity relating to a scheduled offence. Not every unaccounted asset qualifies. Property that is merely unexplained or undisclosed is not proceeds of crime unless it is derived from such criminal activity. The Explanation does not dilute the link. Property derived from activity 'relatable' to the scheduled offence is included, but the scheduled offence must still exist and be registered. |
2. The Actors and the Process
Term | Definition, in substance |
|---|---|
Person, s. 2(1)(s) | Includes an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals whether incorporated or not, every artificial juridical person, and any agency, office or branch owned or controlled by any of them |
Investigation, s. 2(1)(na) | Includes all the proceedings under the Act conducted by the Director or by an authority authorised by the Central Government for the collection of evidence |
Special Court, s. 2(1)(z) | A Court of Session designated as a Special Court under s. 43(1) |
3. The Preventive System
Term | Definition, in substance |
|---|---|
Reporting entity, s. 2(1)(wa) | A banking company, financial institution, intermediary, or a person carrying on a designated business or profession |
Banking company | A banking company or co-operative bank to which the Banking Regulation Act, 1949 applies, including banks and banking institutions referred to in that Act |
Financial institution | A financial institution as defined in the RBI Act, 1934, and including chit fund companies, housing finance institutions, authorised persons, payment system operators, non-banking financial companies and the Department of Posts |
Intermediary | Stock-brokers, sub-brokers, share transfer agents, bankers to an issue, trustees, registrars, merchant bankers, underwriters, portfolio managers, investment advisers and others registered with SEBI; recognised stock exchanges; and intermediaries registered with the PFRDA |
Person carrying on designated business or profession, s. 2(1)(sa) | Persons carrying on games of chance for cash or kind, including casinos; Inspectors-General of Registration as notified; real estate agents as notified; dealers in precious metals, precious stones and other high-value goods as notified; persons engaged in safekeeping and administration of cash and liquid securities as notified; and such other activities as the Central Government may notify |
§ Notified categories • Real estate agents are brought in as notified by the Central Government, reflecting the use of property in the integration stage of laundering. • Dealers in precious metals and precious stones have been notified in respect of cash transactions of ten lakh rupees or more. • Virtual digital asset service providers. By notification of March 2023, persons carrying on the following activities for or on behalf of another person became reporting entities: exchange between virtual digital assets and fiat currencies; exchange between forms of virtual digital assets; transfer of virtual digital assets; safekeeping or administration of virtual digital assets or instruments enabling control over them; and participation in financial services related to an issuer's offer and sale of a virtual digital asset. 'Virtual digital asset' takes its meaning from the Income-tax Act. • Professionals. In 2023, practising chartered accountants, company secretaries and cost accountants were notified as reporting entities when carrying out specified financial transactions on behalf of clients. |
4. The Client and the Beneficial Owner
Term | Definition, in substance |
|---|---|
Client, s. 2(1)(ha) | A person who is engaged in a financial transaction or activity with a reporting entity, and includes a person on whose behalf the person who engaged in the transaction or activity is acting |
Beneficial owner, s. 2(1)(fa) | An individual who ultimately owns or controls a client of a reporting entity, or the person on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a juridical person |
Client due diligence (the Rules) | Due diligence carried out on a client using reliable and independent sources of identification, including identifying the beneficial owner and understanding the purpose of the relationship |
§ Identifying the beneficial owner Under the Maintenance of Records Rules, a beneficial owner of a company is identified by a controlling ownership interest, now set at more than ten per cent, lowered from twenty-five per cent by the 2023 amendments, or by control through other means. For partnerships and other entities, the Rules set their own thresholds and tests, and where no individual meets them, the relevant senior managing official is identified. Why it matters. Shell companies and nominees are the tools of layering. Beneficial ownership rules look through them to the individual who actually controls the money. |
5. Frequently Asked Questions
What are proceeds of crime under the PMLA?
Property derived or obtained, directly or indirectly, from criminal activity relating to a scheduled offence, or its value, including equivalent property in India where the proceeds are held abroad, under Section 2(1)(u).
What is a scheduled offence?
An offence in Part A of the Schedule; an offence in Part B if the value involved is one crore rupees or more; or an offence in Part C, under Section 2(1)(y).
Who is a reporting entity?
A banking company, financial institution, intermediary, or a person carrying on a designated business or profession, under Section 2(1)(wa).
Are crypto exchanges covered by the PMLA?
Yes. Since March 2023, virtual digital asset service providers carrying on notified activities are reporting entities.
Who is a beneficial owner?
The individual who ultimately owns or controls a client, or on whose behalf a transaction is conducted, including one exercising ultimate effective control over a juridical person, under Section 2(1)(fa).