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Prevention of Money Laundering Act UPSC NOTE

 Why has the apex banking regulator penalised Paytm Payments Bank Ltd?

  • The RBI has disallowed the Paytm subsidiary from accepting further deposits,.

  • It indcludes top ups or credit transactions into its operated wallet or accounts from February 29.

  • This also applies to its prepaid instruments for FASTags and National Common Mobility Cards (NCMC) cards. 

  • Present customers would, however, be allowed to use their existing balances to avail the services

  • The payments bank, according to Macquire Capital, houses the parent company One97 Communication (OCL)’s more than 330 million wallet accounts. 

  • PPBL has been prohibited from carrying out any banking services (in the nature of services like AEPS, IMPS etc), bill payments and UPI.

  • It has also been directed to “terminate at the earliest”, or before February 29, nodal accounts of its parent company and Paytm Payments Services. 

  • Nodal accounts are a type of bank account opened by businesses (financial intermediaries) and are used for holding money from participating banks.

  • Lastly, the regulator has asked the subsidiary to settle all pipeline and nodal accounts transactions by March 29. 

  • No further transactions shall be permitted thereafter. 

  • Equity researchers at Macquire Capital believe the move may result in revenue and profitability implications in the medium to long term

  • The parent company expects the latest action would have a “worst case impact” of ₹300 to ₹500 crore on its annual EBITDA (earnings before interest, taxes, depreciation, and amortisation).

What are the concerns regarding money laundering?

  • The first set of concerns relates to its licensing.

  • RBI guidelines for licensing of payments banks stipulate that entities cannot undertake lending activities. 

  • PPBL does not lend directly. 

  • Instead, it provides credit-dispensing products from third parties. 

  • The other issue relates to its governance structure and related party-transactions

  • For perspective, Paytm owns 49% of PPBL. 

  • OCL in its initial response put forth that, adhering to banking regulations.

  • It further argued against having exerted any influence on the subsidiary's operations other than as a minority board member or shareholder.

  • It further communicated having “reconfirmed” with founder that he has not taken any margin loans or pledged any shares.

  • Researchers at Macquire observed the bigger issue arose with the company not being in the good books of the regulator

  • Furthermore, news publication NDTV Profit recently learnt that over 1,000 accounts were found to be linked with the same PAN to their accounts. 

Prevention of Money Laundering Act - PMLA Objectives

  • The Prevention of Money Laundering Act (PMLA) is a legislation enacted by the Indian Parliament in 2002 to prevent and combat money laundering. 

  • The Act defines money laundering as the process of disguising the illegal origin of money, thereby making it appear to be legitimate. 

  • This is typically done through a series of transactions that layer the money and move it around to different jurisdictions.

The PMLA has several objectives, including:

  • To prevent the generation of black money: The Act aims to curb the generation of black money by making it difficult for criminals to launder their ill-gotten gains.

  • To deter criminals from engaging in illegal activities: By making it more difficult to launder money, the Act aims to deter criminals from engaging in illegal activities such as drug trafficking, terrorism, and corruption.

  • To protect the financial system: The Act helps to protect the financial system from being used for money laundering activities.

  • To confiscate the proceeds of crime: The Act allows the authorities to confiscate the proceeds of crime, which can then be used to fund law enforcement or other government initiatives.

  • To promote international cooperation: The Act is in line with international standards on money laundering and helps to promote international cooperation in combating this crime.

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