2025 (5) TMI 76 - AT - Money Laundering

Bank penalty reduced for failing to file Cash Transaction Reports exceeding Rs. 10 lakhs monthly

The Solapur Social Urban Co-Op. Bank Ltd. Versus The Director Financial Intelligence Unit, New Delhi

The Solapur Social Urban Co-Op. Bank Ltd. Versus The Director Financial Intelligence Unit, New Delhi - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 (PMLA) were:Whether the appellant bank failed to comply with the statutory obligation under Section 12(1)(b) of the PMLA read with Rules 3(1)(A), (B), and (D) of the PML Rules, 2005, by not filing the requisite Cash Transaction Reports (CTRs) for integrally connected cash transactions exceeding Rs. 10 lakhs in aggregate per month.Whether the bank failed to establish an effective internal mechanism for the detection and reporting of suspicious transactions as mandated under Section 12A of the PMLA.Whether the penalty imposed by the Director, Financial Intelligence Unit (FIU), India, for non-compliance with the above provisions was justified and proportionate, considering the bank's status as a small cooperative bank with limited resources and technical capability.Whether the appellant bank was entitled to leniency or a warning instead of monetary penalty under Section 13(2)(a) of the PMLA, given the admitted contraventions and subsequent remedial steps taken.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Failure to file Cash Transaction Reports (CTRs) as required under PMLARelevant legal framework and precedents: Section 12(1)(b) of the PMLA mandates that every banking company shall maintain records of cash transactions exceeding Rs. 10 lakhs and report such transactions to the FIU by filing CTRs. Rule 3(1)(B) of the PML Rules, 2005, specifically requires filing of CTRs for integrally connected cash transactions aggregating to Rs. 10 lakhs or more in a month.Court's interpretation and reasoning: The Tribunal examined the RBI inspection report which revealed multiple cash transactions exceeding Rs. 10 lakhs in two accounts-S.N. Salar and Abul Barkat Traders-spread over various months in 2013-14. It was found that the bank failed to file a total of 9 CTRs corresponding to 35 integrally connected cash transactions during the relevant period.Key evidence and findings: The RBI inspection report and the bank's own admissions during personal hearings confirmed the non-filing of CTRs. The bank acknowledged the omission and submitted revised statements and account details. The Tribunal tabulated monthly transactions and the corresponding number of CTRs that should have been filed but were not.Application of law to facts: The bank's failure to file CTRs was a clear contravention of Section 12(1)(b) and Rule 3(1)(B) of the PML Rules. The bank's argument of technical incompetency and outdated software, while noted, did not absolve it of statutory obligations.Treatment of competing arguments: The appellant contended that it was a small cooperative bank with limited technical capacity and that the failure was not willful but due to lack of computerization and expertise. The bank also argued that it had updated its systems in 2015 and had since complied with reporting requirements. The Tribunal acknowledged these points but emphasized that the statutory duty to report transactions was not discretionary and the failure to file CTRs during the relevant period warranted penalty.Conclusions: The Tribunal upheld the finding of non-compliance with the requirement to file CTRs for the specified cash transactions during 2013-14, confirming the bank's admitted lapses.Issue 2: Failure to put in place an effective internal mechanism for detection and reporting of suspicious transactionsRelevant legal framework and precedents: Section 12A of the PMLA requires banks to have an Anti-Money Laundering (AML) policy and an effective internal mechanism including alert systems and Red Flag Indicators (RFIs) for detection and reporting of suspicious transactions (STRs).Court's interpretation and reasoning: The Tribunal noted the bank's admission that it had no system of alert generation and had not implemented RFIs in its Core Banking System (CBS) during the relevant period. The AML policy submitted was found lacking in robustness and detail, particularly the English version.Key evidence and findings: The bank's own submissions during hearings and written replies confirmed the absence of an effective internal mechanism and inadequacies in AML policy documentation. The RBI inspection report also highlighted these deficiencies.Application of law to facts: The failure to implement an effective internal mechanism and maintain a robust AML policy was a violation of Section 12A of the PMLA. The Tribunal emphasized the importance of such mechanisms in combating money laundering and the bank's admitted shortcomings justified imposition of penalty.Treatment of competing arguments: The appellant argued that it had since updated its software and intended to implement RFIs going forward, and that no irregularities were reported post-2014-15. The Tribunal accepted the remedial steps but held that the failure during the relevant period could not be ignored.Conclusions: The Tribunal confirmed the bank's failure to maintain an effective internal mechanism during the relevant period and upheld imposition of penalty, albeit reduced in amount.Issue 3: Appropriateness and quantum of penalty imposed under PMLARelevant legal framework and precedents: Section 13 of the PMLA empowers the FIU to impose monetary penalties for non-compliance with reporting and AML obligations. Section 13(2)(a) permits issuance of warning instead of penalty in certain circumstances.Court's interpretation and reasoning: The Tribunal considered the bank's status as a small cooperative bank with limited resources, its admitted contraventions, and the fact that it had updated its systems and was compliant thereafter. The Tribunal found the original penalty imposed by the Director, FIU-Rs. 50,000 per CTR for 9 CTRs (total Rs. 4,50,000) plus Rs. 1,00,000 for failure to maintain internal mechanism-excessive and disproportionate.Key evidence and findings: The bank's financials, limited branch network, and lack of skilled staff were noted. The Tribunal also noted that no irregularities were reported after 2014-15 and that the bank had taken remedial measures.Application of law to facts: While the Tribunal declined to reduce the penalty to a mere warning, it adopted a lenient approach by drastically reducing the penalty to a consolidated Rs. 50,000 for all 9 CTRs and Rs. 10,000 for failure to maintain an effective internal mechanism, totaling Rs. 60,000.Treatment of competing arguments: The appellant's plea for leniency based on its small size and remedial steps was balanced against the respondent's submission that the penalty was already lenient as it was based only on CTRs and not on the larger number of unfiled Suspicious Transaction Reports (STRs). The Tribunal found merit in both arguments but prioritized proportionality and fairness.Conclusions: The Tribunal reduced the penalty from Rs. 5,50,000 to Rs. 60,000 and directed payment within six months, thus preserving the deterrent effect while acknowledging the bank's mitigating circumstances.3. SIGNIFICANT HOLDINGSThe Tribunal established the following core principles and made final determinations:'The failure to file Cash Transaction Reports (CTRs) for integrally connected cash transactions aggregating Rs. 10 lakhs or more in a month constitutes a clear contravention of Section 12(1)(b) of the PMLA read with Rule 3(1)(B) of the PML Rules, 2005.''A banking company is mandated under Section 12A of the PMLA to maintain an effective internal mechanism, including alert systems and Red Flag Indicators, for detection and reporting of suspicious transactions. Absence of such mechanism during the relevant period is a violation warranting penalty.''While technical incapacity and small size of the bank are relevant mitigating factors, they do not absolve the bank from its statutory obligations under the PMLA.''The quantum of penalty must be proportionate to the nature and extent of contravention, the size and capacity of the bank, and the remedial steps taken. Hence, the penalty imposed by the Director, FIU, though justified in principle, is reduced from Rs. 5,50,000 to Rs. 60,000 as a lenient measure.''The bank is directed to deposit the reduced penalty within six months from the expiry of the limitation period for filing the appeal.'