In a surprise development recently, the finance ministry notified changes in the Prevention of Money Laundering Act (PMLA), 2002, widening its ambit to include financial transactions facilitated by chartered accountants (CAs), company secretaries (CSs) and cost and works accountants (CWAs).
Following the changes, financial transactions by these professionals, including operating and managing their client’s firms and trusts, and buying and selling business entities, will be covered under the anti-money laundering law. The changes have been made in Section 2 of the PMLA, which defines “relevant persons” and firms covered under the anti-money laundering law. Prior to these changes, PMLA 2002 did not include these professionals. Now, these professionals will be responsible for activities such as buying and selling of any immovable property, managing assets creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities by their clients.
They would need to examine the ownership and financial position, including clients’ sources of funds, and record the purpose of the specified transaction. Otherwise, they will be liable. Failure to meet the requirements will result in penalties imposed by the Director of Financial Intelligence Unit – India (FIU-IND) under Section 13 of the Act.
It is apparent that the amendment to the PMLA has been done as a reaction to the Chinese apps scam. Some professionals were actively involved in assisting to set up shell companies to act as a foil for the apps. Not only did they use their office address as the registered office of the company, they became directors in these companies. In a few instances, they also got powers to operate bank accounts of these companies. Some of these apps offered instant loans, which was too tempting to resist for many.
In another notification on May 9, the finance ministry directed that an individual acting on behalf of another person as a formation agent of companies and limited liability partnerships, or acting as a director or secretary of a company, or providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust will now be covered under the anti-money laundering law. This came after a week of the notification on CAs and others related professionals.
The widening of the PMLA ambit is not without exceptions. The notification also clarifies that advocates, CAs, cost accountants or company secretaries in practice, who are engaged in the formation of a company to the extent of filing a declaration, will not come under the ambit of PMLA. Further, any activity carried out by an employee on behalf of his employer in the course of or in relation to his employment will be excluded. Any activity that is carried out as part of any agreement of lease, sub-lease, tenancy, or any other agreement or arrangement for the use of land, buildings, or any space subject to a deduction of income tax is also excluded.
The purpose of these notifications is to expand the list of persons who would be required to reconstruct the transactions carried out by them should there arise any regulatory need. The strengthening of India’s anti-money laundering framework is in anticipation of the upcoming visit of the Financial Action Task Force which would review the effectiveness of these laws.
These persons would now be treated as reporting entities and would be subject to additional obligations such as verification of identity of the persons for or on whose behalf they may be acting, maintenance of records, conducting enhanced due diligence, furnishing information in the manner required under the law, etc.
The aforesaid notification will include those who may be engaging as a service provider, say a company formation agent, or in a fiduciary capacity say a trustee, or under a particular designation say a partner of a firm for or on behalf of another person. Exclusion is provided for professionals such as advocates/CAs/CMAs/ CSs in practice who furnish the requisite declaration for satisfaction of company registration requirements.
Some experts believe that notable omissions to the amendment to the PMLA are lawyers and legal consultants. If the government wants to close every aspect to prevent money laundering, it should cover lawyers and legal professionals too. Those who indulge in money laundering would take the assistance of legal professionals too.
Considering the onerous compliance requirements and low conviction rate under the law, the inclusion of practising CAs, CSs and CWAs under the purview of PMLA is a significant step. This is due to a few undesirable events.
—By Abhilash Kumar Singh and India Legal Bureau