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PMLA and CAs: Inclusion within the enforcement ambit

The money laundering law of India relies on access to information for effective enforcement and adjudication. Recently, the net of the law has been widened to include professionals such as chartered accountants, company secretaries, and cost and works accountants to supply information as 'reported entities' to the enforcement authorities. It is a notable move raising interesting legal and practical questions and mandating professionals to maintain records and share information when required under law.

Finance professionals like Chartered Accountants (‘CAs’), Company Secretaries (‘CSs’) and Cost Works Accountants (‘CWAs’) are important pillars of an economy of a country as they play a vital role in economic development of a country. These professionals are crucial to economic functioning and growth, as they provide financial analysis and information to the government, businesses and other organizations which help in building the economy of the country. The information provided by these professionals can be useful in making decisions about economic policies, investments and taxation. They also help in ensuring that the financial system of a country is stable, and businesses of the country are working in a risk-free, compliant-with-law environment. They also provide insights into how businesses can improve their profitability, manage their risks, and comply with the regulations.

Some specific examples of the roles that these professionals play in economic growth are:

  • CAs perform the accounting and audit function, preparation of financial statements which are used by stakeholders, creditors and investors to assess the financial health of the business, besides helping businesses in complying with the accounting standards and regulations.

  • CSs help in complying with corporate governance regulations which ensure that the businesses are running in an accountable and transparent way. They also help businesses to prepare annual reports and other corporate documents.

  • CWAs help in calculating the cost of production, which can be used for setting up the prices and make other business-related decisions. They also help in making decisions which can be helpful in identifying the areas where costs can be reduced.

THE ROLE OF CHARTERED ACCOUNTANTS

The Chartered Accountants Act, 1949 (‘CA Act’) is the statute which regulates the profession of Chartered Accountants in India. Chapter 2 of the CA Act provides for the Institute of Chartered Accountants of India (‘ICAI’) which is a statutory body constituted for promotion, development and regulation of the profession of Chartered Accountancy in India.

As per the CA Act, the scope of the practice that a CA is permitted to carry out in the course of his profession is quite wide. The following is considered as the practice scope as per the CA Act (s. 2(2) of the CA Act):

  • engaging in the practice of accountancy

  • performing services involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements

  • holding out to the public as an accountant

  • rendering professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data

  • rendering such other services which in the opinion of the ICAI are rendered by a CA.

A basic reading of the above shows that the practice scope of CAs is quite wide and includes performing several other services or provisioning of various deliverables to clients other than the simply understood functions of auditing and accounting. In simpler terms, anything to do with financial facts, data, records, valuation, and functions, would be doable by a CA. A CA can even become a director in any company provided his partner is not the auditor of such company (refer Schedule I, Part I (11) Proviso, of the CA Act).

Recently, in many cases, CAs have been impleaded in complaints and chargesheets for exceeding the scope of their duties and statutory functions for various allegations such as aiding or abetting frauds, facilitating money laundering processes, conducting wrong, irregular or neglectful audits without reporting fraud, or ignoring and neglecting wrongful statements in the financials of their clients. Besides this, with the growth in market practices and requirement of financial experts, the wide practice scope permissibility as per law has led to diversification of the role of the CA. These professionals, not all but several or many, are advising and assisting clients in financial transactions such as purchase and sale of assets, setting up companies, managing the securities and other asset portfolios of their clients, besides others.

All of the above has led to the requirement of certain portions of their practice scope to be included within the ambit of record keeping and information sharing under the money laundering law. Before, however, we analyze the manner and implications of their inclusion under such law, it would be relevant to understand certain basic provisions of the Prevention of Money Laundering Act, 2002 ('PMLA').

PMLA BASICS

As per the provisions of s. 3 of the PMLA, a person shall be guilty of the offence of ‘money laundering’ if he has directly or indirectly attempted to indulge, assisted or knowingly is party, or is actually involved in activities connected with proceeds of crime. Inter alia, PMLA identifies concealing, using, investing, transferring, disposing, and using proceeds of crime, as the offence of money laundering.

Proceeds of crime, here, refers to property directly or indirectly derived from criminal activity related to a scheduled offence. Further, scheduled offence refers to certain offences that have been enlisted and identified as such in the Schedule of the PMLA. These offences include serious criminal offences, and the law intends that any monies or properties that are derived from such serious scheduled offences, should be treated as 'proceeds of crime' and anyone who deals with such proceeds of crime should be punished for money laundering.

Interestingly, not just the person who has committed the schedule offence, but also the person who has aided and abetted (or, assisted) in dealing with the proceeds of crime, would also be equally punishable as the former person, for the offence of money laundering. Ss. 3 and 4 of PMLA make no difference in either the charge of the offence or its punishment for these two persons.

THE NOTIFICATIONS

Two notifications have been recently issued under the PMLA, notifying certain activities which if carried out by CAs, CSs, and CWAs, would make such professionals be treated as 'reporting entities' for the purpose of PMLA.

1st notification (dated 3rd May 2023)

Vide the 1st notification, dated 03.05.2023, the Central Government has, in the exercise of the powers conferred by s. 2(1)(sa)(vi) of PMLA, notified that the financial transactions carried out by a 'relevant person' on behalf of his client, in the course of his or her profession, in relation to the following activities shall be an activity for the purposes of the said sub-section:

  1. buying and selling of any immovable property;

  2. managing of client money, securities or other assets;

  3. management of bank, savings or securities accounts;

  4. organization of contributions for the creation, operation or management of companies;

  5. creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.

2nd notification (dated 9th May 2023)

Vide the 2nd notification, dated 09.05.2023, the Central Government has, in the exercise of the powers conferred by s. 2(1)(sa)(vi) of PMLA, notified that the following activities when carried out in the course of business on behalf of or for another person, as the case may be, as an activity for the purposes of said sub-clause, namely:

  1. acting as a formation agent of companies and limited liability partnerships;

  2. acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;

  3. providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;

  4. acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and

  5. acting as (or arranging for another person to act as) a nominee shareholder for another person.

The following activities are excluded from the scope of the above activities:

  • 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 or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961; or

  • any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or

  • any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under s. 7(1)(b) of the Companies Act, 2013; or

  • any activity of a person which falls within the meaning of an intermediary under s. 2(1)(n) of PMLA.

REPORTING ENTITY OBLIGATIONS

The obligations attached to being a reported entity primarily are in the nature of maintenance of records, sharing of information with statutory authorities, and exercising caution. More specifically, these obligations include the following:

  • Verification and maintenance of records of the clients (s. 11A of PMLA).

  • KYC reporting to be undertaken by the Chartered Accountants (s. 12).

  • The Chartered Accountants are required to provide to the PMLA authority access to information as and when called for (s. 12A).

  • The Chartered Accountants shall undertake enhanced due diligence for specified transactions. E.g., any transaction in foreign exchange (s. 12AA).

  • Monetary penalty shall be imposable on the reporting entity in case of non-compliance of the obligations mentioned under PMLA (s. 13).

Apart from these sections, the Central Government, in consultation with the Reserve Bank of India, had issued the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’), pertaining to maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information, and verification of client records of the banking companies, financial institutions and intermediaries.

The purpose of these rules is to prevent money laundering by making it more difficult for criminals to conceal the source of their funds and the identity of offenders as well as the abettors. The PML Rules require reporting entities to maintain the following records:

  • The identity of their clients, including their name, address, date of birth, and photograph;

  • The nature and value of all transactions with their clients;

  • The purpose of all transactions with their clients;

  • The source of funds used for all transactions with their clients.

Reporting entities are required to maintain these records for a period of ten years from the date of the transaction. The PML Rules also require reporting entities to report suspicious transactions to the Financial Intelligence Unit of India (‘FIU-IND’). By requiring reporting entities to maintain records of their transactions with clients, the rules make it more difficult for criminals to conceal the source of their funds. The rules also help the FIU-IND to identify and investigate suspicious transactions. Here are some of the key provisions of the PML Rules:

  • Reporting entities must maintain records of all transactions with their clients, including the identity of the client, the nature and value of the transaction, and the purpose of the transaction.

  • Reporting entities must maintain these records for a period of ten years.

  • Reporting entities must report suspicious transactions to the FIU-IND.

One noteworthy aspect here is that only a limited number of functions or activities, if carried out by CAs, CSs, and CWAs, have been identified in the above two notifications. For instance, the function of 'audit' conducted by a CA is not listed in either notification. One may ask whether the obligations that arise from these notifications also cover such unlisted functions e.g., audit. An apparent and obvious answer to this question is 'no'. Had the intent behind the notifications been to cover all the activities of a professional, such professional would simply have been named as a reporting entity.

Further, it is to be noted that only 'financial transactions', if carried out on behalf of the clients would constitute a professional to be a reporting entity. Advising or carrying out any other accountancy function with respect to such financial transactions seems to be not cast within the reporting entity net. For example, advising a client with respect to the purchase of an immovable property, or carrying out the valuation of an immovable property with the objective of assisting a client to purchase such property, would not make the CA a reporting entity.

CONCLUSION

The inclusion of CAs, CSs and CWAs under the PMLA will increase their accountability and liability. Professionals need to be extremely careful, adhere to professional standards, and be vigilant in their due diligence procedures while onboarding new clients or even when dealing with the existing ones. These measures by the government demonstrate their commitment to cracking down on money laundering transactions, the formation of shell companies or trusts, and other similar entities. Though these notifications apparently stem from the impending review of India's money laundering legislative framework by the Financial Action Task Force (FATF), the mandate so laid down would hopefully be diligently followed by the professionals and carefully enforced by the Directorate of Enforcement.

Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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