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  • Apurva Singhi

Changes to Anti-Money Laundering Laws in India: A Step in the Right Direction?

[Apurva is a student at West Bengal National University of Juridical Sciences.]


The Prevention of Money Laundering Act 2002 (PMLA) is a legislation aimed at curbing corruption and ensuring prompt reporting of the same. On 4 May, 2023, the Ministry of Finance notified changes to the PMLA. These changes increased the responsibility of Chartered Accountants (CA), Company Secretaries (CS), and Cost and Works Accountants (CWA). They were brought under the PMLA for specified financial transactions undertaken on behalf of their clients, which include buying and selling of immovable properties, management of bank accounts, managing of client money, securities and other assets, organisation of contributions for the creation, operation or management of companies, and creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities. This amendment comes amidst several other changes to the regime, which are said to have been influenced by the upcoming proposed assessment of India under the Financial Action Task Force (FATF) later this year. This move is expected to increase the responsibility, accountability and liability of CAs, CS and CWAs. It will alter the way in which due diligence is carried out with respect to examination of the source of funds as well as the reporting of irregularities.


The Obligations and Responsibilities of Reporting Entities


The amendment designates CAs, CS, and CWAs as reporting entities by the power granted to the government under Section 2(1)(sa)(vi).


As per Section 2(1)(wa), a reporting entity inter alia includes a person carrying on a designated business or profession. The definition of 'person carrying on a designated business or profession' has been given under Section 2(1)(sa). Section 2(1)(sa)(vi) provides that the Central Government may, by notification, designate from time to time a person carrying on such other activities. Over the years, several other entities have been notified under this section, which inter alia include real estate agents, dealers in precious metals and precious stones, multi-state co-operative societies, registrars or sub-registrars, insurance brokers and certain individuals dealing in virtual digital assets, among others. On 9 May 2023, the Central Government also notified formation agents, nominee directors, etc., as reporting entities.


Under the PMLA, Section 11A requires the entities to verify the identity of its clients as well as the beneficial owner. Section 12 requires the reporting entity to maintain records of all transactions for a period of 5 years. The rules, however, prescribe a period of 10 years. Under Section 12A, the reporting entity may, at any time, be required to furnish the information maintained under Section 12 to the Director. Section 12AA prescribes enhanced due diligence. The procedure and manner of maintaining and furnishing reports may be prescribed by the Central Government in consultation with the Reserve Bank of India as per Section 15.


If there is a non-compliance with the responsibilities of the reporting entities, the Director may impose a fine as under Section 13 with a minimum of INR 10,000 and a maximum of INR 1,00,000. The Director may also issue a warning, give specific instructions to the entity or require them to send in reports at regular intervals on the measures being taken by it. However, as per Section 14, other than Section 13, the reporting entities or its personnel will not be subject to any criminal or civil proceedings for furnishing information under Section 12. Thus, the liability of reporting entities extends to a fine, and other criminal consequences are not attracted.

An audit of the records of the reporting entity may be also be ordered if necessary. Under Section 50, any officer of the entity can be summoned before the Director and examined under oath. The PMLA (Maintenance of Records) Rules 2005 provide detailed directions for the maintenance of records and the obligation and procedure for furnishing details to the director. The rules also provide for due diligence and KYC requirements.


Thus, reporting entities have an enhanced obligation of reporting and due diligence for prevention of money laundering. The maximum penalty that may be attached is INR 1,00,000. There is no provision for imprisonment. However, if the entity is found to be party to the offence or enjoying the proceeds of crime, the reporting entity would be liable under the law but not due to its role as a reporting entity. Thus, by the inclusion of CAs, CS and CWAs as reporting entities, their liabilities are restricted to those under Section 13, which are not heavily onerous. If the reporting entity, in its role as a financial intermediary, is participating in the activity of money laundering, it would be liable under the law irrespective of its designation as reporting entity. However, it is unclear whether CAs will be equally responsible if the PMLA is invoked against the client for the specified transactions, if it has not been reported to the regulators by the reporting entities due to the fraud not being noticed, even though the diligence is carried out.


Prior Reporting Requirements


It has been noted that the notification may increase the compliance burden on professionals. However, the Companies Auditors Report Order 2020, issued by the Ministry of Corporate Affairs, prescribes the format for the statutory audits of all companies, applicable from the financial year 2020-21. Among other requirements, it imposes an obligation to report on frauds, complaints by whistle blowers, details about properties owned by the company, funds raised, and other compliances. Further, SA (Standards on Accounting) 240, specified by the Institute of Chartered Accountants of India, provides the auditor’s responsibilities relating to fraud in an audit of financial statements. The guidelines and ethical standards applicable to CAs also outline their responsibilities towards reporting of suspicious transactions. The Companies Act 2013 also places the onus of reporting of financial frauds on CAs and CS. The guidelines and ethical standards for CS and CWAs also highlight the responsibility of reporting of frauds.


Thus, the current notification does not add a requirement that is extremely removed from the duties of a CA. Under the extant code of conduct, the professionals already have a duty to be cautious of suspicious transactions. Rather, the notification formalizes the duties that are already present in the code of conduct of these professional entities.


Reason for and Impact of the Changes


The FATF is a global agency that monitors money laundering and terrorism financing. The intergovernmental organisation creates global norms with the intention of curtailing these unlawful actions. Recommendation 22 of the FATF provides that lawyers, notaries, other independent legal professionals and accountants need to comply with the customer due diligence and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17 when they prepare for or carry out transactions for their client concerning certain activities.


The intent behind the notification is to increase accountability among all participants in money laundering in order to stop transactions involving illicit funds, including their conversion into legitimate money. The reason for including CAs, CS and CWAs first may also be because of the nature of transactions they are involved in for their clients and overall for the economy. There is a need to ensure that these services are not utilised for illegal purposes, as was observed in recent cases, which is also cited as one of the motivations for the current notification.


A Cross-Jurisdictional Analysis


FATF recommendations are being taken up in other countries as well. In Canada, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act also envisages reporting entities who help in detection of fraud. The entities included are similar to those in India. In the UK, the guide published by the Consultative Committee of Accounting Bodies delineates the obligations of the accountancy sector, including Consumer Due Diligence, Money Laundering Reporting and Suspicious Transaction Reporting. The obligations apply in England, Wales, Ireland and Scotland. In Australia as well, accountants come under the purview of the relevant money laundering legislation. The UK as well as Australia require accountants to file suspicious activity reports as reporting entities. However, in the USA, accountants and other gatekeeper entities are not included in the anti-money laundering legislation.


Similarly, for legal professionals, while some jurisdictions have reporting requirements, such as the UK and Australia, others, such as the USA, do not have the same. While most countries are FATF compliant in this regard by including accountancy professionals in money laundering legislations, the USA stands out as one of the non-compliant countries. However, it has been reported that efforts are being made to improve the anti-money laundering regime and increase FAFT compliance. Thus, the global trend seems to be towards the inclusion of accountancy professionals in anti-money laundering laws.


Conclusion


This article sought to explore the impact and cause of the Central Government notification designating CAs, CS and CWAs as reporting entities under the PMLA. In this regard, the article has contributed in three ways. First, it has highlighted the obligations that CAs, CS and CWAs will now be treated as reporting entities under the PMLA. It looks into whether these obligations are new to the professionals and whether they are highly onerous. It finds that these obligations have existed in some form or another under extant guidelines and code of ethics. However, the PMLA formalizes the obligations and adds a penalty for not following the same. Second, it looks into the motivations and reasons for the notification. Third, it looks into whether such obligations exist in other jurisdictions as well and finds the answer to be positive. Thus, the article finds that the changes to the PMLA regime are compliant with FATF recommendations and changes in other jurisdictions.

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