The real estate industry in India has long been known for the exploitation and malpractices of the builders. With the introduction of Real Estate (Regulation and Development) Act, 2016, there has been a fair attempt to bring the real estate sector under scrutiny by imposing mandatory compliances and heavy penalties on the developers. One of the major developments in the real estate industry has been the inclusion of real estate developers, brokers and agents within the legal ambit of Prevention of Money Laundering Act, 2002 (“PMLA”). A notification of Ministry of Finance in 2023 brought the real estate agents and developers within the definition of “reporting entities” under Section 2(1)(wa) of the PMLA. This is where the stakeholders in the real estate sector need to update their legal obligations and compliances. Consulting experienced PMLA lawyers becomes essential for correct guidance.
Mandatory Compliance Under PMLA
As per PMLA, a reporting entity shall maintain records of all transactions, verify the identity of all clients by implementing due diligence and KYC, furnish information to Financial Intelligence Unit and appoint a Principal Officer for compliance. Therefore, after the 2023 notification, the real estate developers and agents shall have to comply with the aforementioned requirements if they buy or sell immovable properties worth INR 10 lacs or more.
Importance of Regulatory Measures
It is wholly known that the Prevention of Money Laundering Act, 2002 was enforced to scrutinize and regulate the act of money laundering and the issues related to it. The real estate sector is believed to be a safe haven for parking the funds and proceeds of money laundering due to which bringing it within the purview of the Act has been one of the welcoming decisions of the legislature.
Enforcement and Judicial Stance
Through the various recent cases, it is evident that the Enforcement Directorate (“ED”) is attaching properties of developers under PMLA. The judgement in the M3M India case also suggests that the Supreme Court does not advocate stringent and blind application of the PMLA provisions, rather it supports commercial interests of the stakeholders involved in a business transaction without affecting the liabilities of the accused company in the alleged criminal involvement. It also suggests that a provisional attachment is not absolute and that the judiciary understands and intends to balance investigation with business continuity. This could happen in the M3M case because the alleged company could satisfy its compliance with the nine parameters which were put before it by the ED.
Key Case Reference
In another case of Deputy Director, ED v. Axis Bank & Ors., the Delhi High Court upheld the act of attaching a property purchased legally when the property which was purchased with tainted money was not available. This is the opposite case law to the M3M case wherein the substitution of property is also allowed to the ED in light of the compliance with the PMLA. Therefore, this clarifies the judicial stance with respect to the incidence between the real estate sector and PMLA, that the crime and the criminal shall not be spared while the interests of other stakeholders shall not be jeopardized.
Practical Steps for Developers and Agents
One thing which stands out through the case laws involving real estate developers and agents under PMLA is that the strict compliance to the provisions of PMLA is strictly non-negotiable. To ensure alignment with the PMLA, the real estate developers and agents shall:
1. Maintain proper repository of their client data. Every transaction undertaken shall be backed by proper KYC of the parties involved including their personal and financial identity.
2. File a Suspicious Transaction Report regarding any suspicious transaction to the concerned authorities.
3. Appoint a specialised person to help in the compliance with the PMLA provisions.
A Move Towards Transparency
With the move to introduce new compliance burden on the real estate developers and agents, India has moved an inch closer to international standards against money-laundering. It also signals that the Indian government is intending towards a stricter approach against money-laundering and the allied crimes.
This is where the real estate stakeholders need to revise their compliance book. They must adhere to client verification, maintaining clean transaction trail and proper risk assessment in order to prove themselves compliant with the PMLA. The intersection of real estate industry with PMLA not only slams the benami transactions but also boosts the confidence of home-buyers, for whom real estate is not just a mode of investment but is also an avenue of dreams where they park their life savings to buy a home.
Author: Ashish Deep Verma, Founder/Managing Partner At Vidhisastras. Views Are Personal