Introduction
In the case of Noida Commercial Co-operative Bank Ltd. v. Director, Financial Intelligence Unit (‘FIU’)[i], the appellant, a co-operative bank, challenged an order under s. 26 of the Prevention of Money Laundering Act, 2002 (‘PMLA’). This order, issued by the FIU Director, imposed a penalty of Rs. 25,70,000/- on the bank for non-compliance with s. 12(1)(b) of the PMLA and related provisions under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’).
The non-compliance involved the bank’s failure to report high-value cash transactions for specific overdraft accounts during the financial year (‘FY’) 2015-2016. This case highlights the mandatory nature of anti-money laundering (‘AML’) requirements and reinforces the PMLA’s purpose in promoting financial transparency and accountability to detect and prevent money laundering.
Facts
The case began when the appellant bank was flagged by the Reserve Bank of India (‘RBI’) for high-value deposits in two overdraft accounts during FY 2015-2016. Subsequently, the FIU issued a show-cause notice (‘SCN’), demanding explanations for the unreported transactions, citing s. 13 read with ss. 12 and 12A of the PMLA and the PML Rules. The bank admitted that it had filed certain cash transaction reports (‘CTRs’) in September 2018, but these were rejected. The bank explained that this oversight, attributed to a misunderstanding that only cash transactions in deposit accounts required reporting, was subsequently rectified by implementing an internal mechanism.
At the hearing, the bank’s representative conceded that it failed to file 16 CTRs and delayed the submission of an additional 6 CTRs. It was also disclosed that, prior to September 2018, the bank did not file CTRs for transactions in loan accounts. The FIU Director determined that the bank had violated the PMLA and its Rules, noting that the oversight was only discovered after the SCN was issued.
Consequently, the FIU Director issued an order imposing a penalty of Rs. 25,70,000/- on the bank, citing violations of s. 12(1)(b) of the PMLA, and rs. 3, 5, 7, and 8 of the PML Rules. The bank challenged this order under s. 26 of the PMLA before the Appellate Tribunal for Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act (‘Tribunal’), arguing that the lapses were unintentional. The bank cited an RBI inspection report from March to April 2018 that highlighted unreported transactions, after which the bank immediately filed nine revised CTRs. However, the FIU system initially rejected five of these revised CTRs from 2016, which were only accepted in 2020.
The bank contended that the penalty – calculated as Rs. 50,000/- per violation for 16 CTRs and Rs. 10,000/- per month of delay over 167 months for six CTRs - was excessive. It argued that s. 13(2) of the PMLA allowed for a warning instead of a penalty and cited the judgment in Hindustan Steel Ltd. v. State of Orissa[ii] to argue that penalties should apply to intentional violations only, which it claimed was not the case here. The bank further asserted that the penalty was calculated on a cumulative monthly basis, which, in their view, resulted in an inflated penalty amount.
In response, the FIU argued that the bank had failed to comply with the mandatory reporting requirements under s. 12(1)(b) of the PMLA. The FIU maintained that statutory reporting obligations had been disregarded, which the bank acknowledged, thereby justifying the penalty.
Held
The Tribunal upheld the penalty imposed by the FIU and dismissed the appeal after reviewing the statutory requirements under s. 12 of the PMLA, which mandates that every reporting entity maintain records of specified transactions - cash, suspicious, and counterfeit transactions - and share this information with the FIU. The Tribunal also examined the procedural requirements outlined under the PML Rules, primarily under the rs. 3, 5, 7 and 8[iii].
Addressing the bank’s reference to the decision in Hindustan Steel Ltd. v. State of Orissa (supra) for a warning instead of a penalty, the Tribunal held this precedent inapplicable since it involved quasi-criminal proceedings, whereas this case concerned civil penalties. Instead, the Tribunal referred to the precedent set in Chairman, SEBI v. Shriram Mutual Fund & Anr.[iv], which established that mens rea, or intent, is not a prerequisite for imposing civil penalties. Relying on this precedent, the Tribunal concluded that penalties are warranted upon any contravention of statutory reporting requirements, regardless of intent.
Additionally, the Tribunal emphasized that s. 13 of the PMLA allows not only penalties but also warnings in cases where the failure might be minor. However, given the bank’s multiple instances of non-compliance, a warning alone was deemed insufficient by FIU, and the Tribunal found no reason to interfere with this assessment. Thus, the bank’s failure to report high-value transactions and its delay in submitting CTRs were determined to be significant breaches of compliance that justified the imposed penalty.
It was noted that since s. 13 of the PMLA empowers the Director, FIU, to impose a penalty on any reporting entity that fails to fulfil its statutory obligations, the Director was within their rights to impose such penalties for each instance of non-compliance. The Tribunal assessed the penalty's appropriateness, focusing on the interpretation of the term ‘each failure’ under s. 13 of the PMLA. It determined that ‘each failure’ refers to each unreported transaction or each day’s delay in reporting a transaction. This interpretation justified the cumulative imposition of penalties on the bank.
Considering the bank’s prolonged delay and repeated non-compliance across numerous transactions, the Tribunal deemed the imposed penalty proportionate. It was held that the bank’s failure to report multiple transactions over an extended period demonstrated a sustained disregard for regulatory requirements. The Tribunal rejected the bank’s request for leniency, stating that such concessions would undermine the statutory framework and compliance expectations under the PMLA.
Our Analysis
This decision is significant in reinforcing strict compliance with AML regulations under the PMLA and reaffirming financial institutions’ obligation to ensure transparency and accountability in their reporting mechanisms. The Tribunal’s interpretation of ‘each failure’ as encompassing every missed or delayed transaction or each day’s delay highlights the seriousness of non-compliance with AML obligations. It signals that failure to report transactions, regardless of intent, will attract penalties.
By ruling that intent is irrelevant in imposing civil penalties, the Tribunal strengthens the deterrent effect of the PMLA, emphasizing that institutions must implement effective internal mechanisms to ensure timely and accurate reporting. Moreover, the Tribunal’s rejection of leniency or warnings in cases of repeated or systemic non-compliance sends a clear message: compliance with regulatory requirements is foundational and non-negotiable. This decision establishes a robust precedent, reinforcing the integrity of AML provisions and promoting a transparent financial environment essential for detecting and combating financial crimes like money laundering.
End Notes
[i] [2024] 167 taxmann.com 174 (SAFEMA - New Delhi).
[ii] (1969) 2 SCC 627.
[iii] Rule 3 requires reporting entities to maintain records of specific transactions; Rules 5, 7, and 8 outline the procedure and timelines for submitting reports to the FIU.
[iv] 2006 (5) SCC 361.
Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.