Practicing Professionals Can Excel Under PMLA regime 2023

Practicing CA, CS, CMA are now covered under the ambit of PMLA as Designated Business or Profession

“Money Laundering” is the concealment of the origins of illegally obtained money through criminal activity (such as drug trafficking or terrorist funding) and making it appear to have come from a legitimate source.

One wrong notion everyone has is; Money Laundering is a victimless crime is false.  The true cost of this heinous activity is borne by the victims of the crimes which has generated the tainted money. Money laundering is a global cause of worry due to the deterioration of the administrative order and economic stability across nations.

Globally, the Financial Action Task Force (FATF), an intergovernmental body introduced by the G-7 Summit in Paris in 1989 and responsible for setting global standards on anti-money laundering and combating the financing of terrorism has been playing its part.

In Indian jurisdiction, The Prevention of Money Laundering Act, 2002 (PMLA) along with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (Rules) & Unlawful Activities (Prevention) Act, 1967 are the principal laws that are enforced to prohibit money laundering activities along with several other subsets like Prohibition of Benami Property Transactions Act, 1988 to as recent as Fugitive Economic Offenders Act, 2018.

Apart from the sector-specific specialized authorities that deal with money laundering are

• Reserve Bank of India (RBI) for banks;
• Securities and Exchange Board of India (SEBI) for stock brokers, intermediaries & even emerging AIF
• Insurance Regulatory and Development Authority of India (IRDA) for life and non-life insurers

These sector-specific regulators lay down guidelines on anti-money laundering standards following PMLA and Rules.

Practicing professionals will now be termed as a “person carrying on designated business or profession” under PMLA Guidelines

The Central Government vide notification no. S.O.2036(E) dated 3^rd May 2023 and amended Section 2 (1) (sa) pertaining to the person carrying on such other activities as Central Government may by notification so designate from time to time.

This amendment specified that 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–

(i) buying and selling of any immovable property;

(ii) managing client money, securities, or other assets;

(iii) management of bank, savings, or securities accounts;

(iv) organization of contributions for the creation, operation, or management of companies;

(v) creation, operation, or management of companies, limited liability partnerships or trusts, and buying and selling of business entities shall be an activity for the purposes of said sub-section.

Therefore, all Practising CA/CS/CMA will now be termed as persons carrying on designated business or profession under the PMLA Guidelines.

*As per the explanation provided “relevant person” means; an individual/firm who has obtained a Certificate of practice as per provisions of the Chartered Accountants Act, 1949 (38 of 1949), Company Secretaries Act, 1980 (56 of 1980) & Cost and Works Accountants Act, 1959 (23 of 1959).

**As per Section 2(1) (ha) client means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.

Who are the other persons carrying on designated business or profession?

Apart from the newly included Practising CA/CS/CMA; persons carrying on designated business or profession already included;

• The person carrying on activities for playing games of chance for cash or kind & includes activities associated with casino
• Inspector General of Registration appointed under the Registration Act, 1908 (Registrar/ Sub-Registrars)
• Real estate agent
• Dealers in precious metals, precious stones, and other high-value goods as may be notified by Govt
• A person engaged in the safekeeping and administration of cash and liquid securities on behalf of other persons as may be notified by the Central Government.

Position of Practising CA’s in PMLA prior to this amendment

Practicing CAs were evoked in PMLA before this amendment. As per section 13 (1A) inserted w.e.f 15/02/2013, Powers of Director to impose fine;

If at any stage of inquiry or any other proceedings before him, the Director having regard to the nature and complexity of the case, is of the opinion that it is necessary to do so, he may direct the concerned reporting entity to get its records, as may be specified, audited by an accountant from amongst a panel of accountants, maintained by the Central Government for this purpose.

For the purpose of this section, “accountant” shall mean a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949) & the expenses of, and incidental to, any audit shall be borne by the Central Government.

Therefore, earlier in cases wherein inquiry was made against reporting entities with regards to non-discharge of obligations under the act; the Director had powers to direct those reporting entities (Banking Companies, Financial Institutions, and Intermediaries) to get their audit done amongst a panel of practicing Chartered Accountant/s.

These “Accountants” as defined under PMLA have now been made reporting entities.

Is this a knee-jerk move?

My guess is this is a thought-out and carefully planned move. In terms of FATF guidelines, this was bound to happen. Designated Businesses and professions globally have included independent legal professionals and accountants, Trust and Company Service Providers as well as Lawyers.

This recent PMLA amendment has included practicing CA/CS/CMA under their ambit, yet Lawyers have been kept out of this ambit. This is a cause of concern amongst the practicing professional community; who believe it is rather harsh on them and lawyers are conveniently skipped.

I believe this has flown from UAPA provisions from order point no 7 (v) dated 2^nd February 2021;

The Ministry of Corporate Affairs shall issue an appropriate order to the Institute of Chartered Accountants of India, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India (ICSI) requesting them to sensitize their respective members to the provisions of Section 51A of UAPA, so that if any designated individual/entity approaches them, for entering/ investing in the financial sector and/or immovable property, or they are holding or managing any assets/ resources of Designated individual/ entities, then the member shall convey the complete details of such designated individual/ entity to UAPA Nodal Officer

Implications of this amendment

Are Practising CA/CS/CMA considered as a “Reporting Entity”?

Yes, by virtue of Section 2 (1) (wa); a banking company, financial institution, intermediary, or a person carrying on designated business or profession is a “Reporting Entity”.

PMLA casts important obligations on Reporting Entity. They are as under;

• Verification of Identity by Reporting Entity (Section 11A)- shall verify the identity of its clients and the beneficial owner (KYC)
• Reporting entity to maintain records (Section 12)- maintain a record of all transactions, entered into with clients so as to enable it to reconstruct individual transactions.

  maintain these records for a period of five years from the date of the transaction between a client and the reporting entity.

• Enhanced due diligence (Section 12AA)- take additional steps to examine the ownership and financial position, including sources of funds of the client, record the purpose behind conducting the specified transaction, and the intended nature of the relationship between the transaction parties. (Where the client fails to disclose shall not allow the specified transaction to be carried out).
• As per section 12 (5), the Central Government may, by notification, exempt any reporting entity or class of reporting entities from any obligation under this Chapter.
• However, whether Chapter IV like obligations cast on Banking Companies, Financial Institutions, and Intermediaries with respect to periodical reports filed under section 15, suspicious transactions whether carried out or attempted reporting, and providing access to records to the Director under PMLA is not clear as of yet. Further instructions to this new class of reporting entities by their respective regulators and/or FIU IND is awaited.

Fines & Penalties

As per section 13(2)(d) if the Director in course of his inquiry finds out that a reporting entity has failed to comply obligations under PMLA; he may by an order impose a monetary penalty on such reporting entity which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.

Legal immunity to disclose

PMLA has granted “immunity” to reporting entities. Under Section 13; there will be no civil or criminal proceedings against reporting entity, for complying with these obligations and they shall not be liable to any civil or criminal proceedings against them for furnishing information under PMLA.

What does this mean for practicing professionals like CA/CS/CMA’s?

1. (Increased) Compliances:

• Verifying the nature & identity of the client was sort of a thumb rule even before the PMLA guidelines. In fact, a certificate from these practicing professionals especially Chartered Accountants is even now insisted by other reporting entities like banks for current account opening.
• CA Regulator ICAI formulated the Know Your Client (KYC) norms at its 356th Meeting in July 2016 for various classes of clients. These norms were made applicable for engagements accepted on or after 1^st January 2017.
• The same norms have also been prescribed by CS regulator ICSI in the form of client information due diligence.
• As a good manufacturing industry best practice, CMA members have been advising their clients to ensure “Know your Partner/Vendor/Supplier” for the last couple of years.
• Also, these regulators (ICAI, ICSI & ICWA) implement a ‘Peer Review’ system. Members members of their own institute review the work of peers for adherence to prescribed norms, as a best practice.
• Hence, compliances were always there. It’s just that with the increasing automation, digitization, and across geographic barriers seamless work; has to form a part of the process; similar to SOP kind of. (CCH software used by some CA offices has this feature of capturing client basic info & ensuring changes are tracked).

Accountability

• Practising CA/CS/CWA will be required to verify financial transactions conducted on behalf of their clients are in no way connected to illegal activities (especially proceeds of crime and financing of terrorism).
• But as practicing professionals, “attestation” always included accountability.

Way ahead for practicing professionals

The overall sense of why Lawyers have been left out of this will always remain a mystery. The ball is not in their court yet as of now!