[Archit is a student at National Law University Jodhpur.]
Given the profession the accounting professionals like practicing Chartered Accountants (CAs), Company Secretaries (CS), Cost and Works Accountants (CWAs) etc., pursue and the duties that the same entail, they may be perceived as being facilitative of their clients' aspiration of laundering illegally-occupied money. The Central Government's move to cover these professionals within the spectrum of Prevention of Money Laundering Act 2002 (PMLA 2002) may unreservedly be considered well-intentioned and in line with FATF's recommendations. But in doing so, the Central Government has lost sight of the challenges posed to accounting experts and their profession, such as increased responsibilities, accountability and a lingering threat of prosecution. Thus, the said move would fare well by altering the stringent, substantive aspect of the amending notification to overcome its procedural and implementation difficulties.
Introduction
Money laundering gives oxygen to organized crime.
Rightly so, money laundering is a bane which not only hinders a nation's economic growth and development but also poses a threat to its security and integrity. In India, statutorily, the term 'money laundering' has been interpreted as an offence involving a person's direct or indirect attempt to indulge, knowingly assist or be actually engaged in a process or an 'activity' connected with the proceeds of crime. The Madras High Court, in Indian Bank v. Government of India, Ministry of Finance, Department of Revenue, Directorate of Enforcement (Indian Bank), observed that for a person to be guilty of the offence of money laundering, it is pertinent that he was involved in such a process or activity knowingly.
It is against the backdrop of and in response to the recent fly-by-night Chinese app scams, wherein some accounting professionals were instrumental in setting up shell companies for Chinese apps, that the Central Government has tweaked the anti-money laundering law, i.e., Prevention of Money Laundering Act 2002 (PMLA 2002), to encompass accounting professionals like CAs, CSs, etc. within its ambit.
PMLA 2002 is a central legislation aimed at deterring money laundering, providing for the confiscation of property obtained through illegal means and applies to all individuals, companies and partnership firms. This legislation has lately undergone significant changes that are aimed towards ensuring greater compliance with FATF recommendations relating to anti-money laundering (AML) / counter-terrorist financing as well as towards bringing uniformity with 2008-RBI circular requiring banks and other financial institutions to follow AML KYC norms.
This article seeks to critically analyze the latest amendments to PMLA 2002, pertaining to inclusion of accounting professionals like CAs, CSs, etc., within the ambit of anti-money laundering laws and offers suggestions to overcome the shortcomings.
Amendments-in-Brief
In exercise of the powers conferred by Section 2(1)(sa)(vi) of PMLA 2002, the Finance Ministry released a couple of notifications to the effect of defining 'relevant persons'. Following this, not only accounting professionals like practicing CAs, CS, and CWAs but also all the entities assisting in the formation of a company like a director, secretary, etc. have been clutched under the gamut of PMLA, if they undertake specified activities (financial transactions) on behalf of their clients. These activities include buying and selling of any immovable property; managing of client money; organizing contributions for the creation or management of companies, etc.
Pursuant to these notifications, the ambit of 'reporting entities' has been expanded. A reporting entity, as defined by Section 2(1)(wa) of PMLA 2002, means and includes a banking company, a financial institution or a person carrying on a designated business or profession. On a cumulative perusal of the section mentioned above with Explanations 1 and 2 of the amending notification, it is unambiguous that the accounting professionals like practicing CAs, CSs and CWAs will also be considered reporting entities.
The amending notification places stringent obligations on the accounting professionals as it requires them to undergo the Know Your Company (KYC) process before the commencement of each specified transaction, carry out due diligence on their client's ownership and financial status, including their clients' sources of funds along with documenting the purpose of a specific transaction. Further, as reporting entities, the accounting professionals will also be mandated to fulfil other compliances, including verifying the identity of their clients and beneficial owner and maintaining a record of all transactions undertaken on behalf of their clients.
Critical Analysis
The legislative intent behind the offence of money laundering, as is evident from the terminology used in its definition, makes it abundantly clear that for the conviction to sustain, there has to be active participation on the part of the accused, and such involvement must have come through knowingly. Concerning the pertinence of the provisions of PMLA in light of a presumption, the Hon'ble High Court of Jharkhand, in Narendra Mohan Singh v. Directorate of Enforcement, took a strict view that direct or indirect involvement of the accused himself in any activity relating to the proceeds of crime is a sine qua non. The Madras High Court, in the Indian Bank case, remarked that, as a requisite, the accused must project the property-in-question as untainted. It is contended that, oftentimes, despite being reasonably vigilant, accounting professionals may not even catch wind of any suspicious activity that their clients may surreptitiously be engaged in behind closed doors. In such cases, technically, even though the accounting professional might, inadvertently, have been instrumental in executing a financial transaction concerning any of the specified activities on behalf of their clients, they cannot be said to have knowingly or deliberately participated in any activity relating to the proceeds of crime.
Further, the phrase 'projecting a property as untainted' sufficiently implies that the accounting professional must misrepresent as untainted the property, which he knows to be tainted. As a corollary to the aforesaid contention, if an accounting professional, for instance, acquires a particular property as per the instructions of his client, who has surreptitiously obtained the required funds through illegal means or has the hidden motive of using the property for unlawful purposes, the accounting professional cannot be said to have projected the property as untainted, since he did not believe it to be tainted in the first place.
The widening of PMLA's ambit and the subsequent inclusion of accounting professionals within its ambit entails that accounting professionals will now be deemed as reporting entities, which are subjected to onerous obligations and duties under the statute. One of the noteworthy obligations the accounting professionals will be required to comply with is undertaking KYC and conducting due diligence to examine the ownership and financial position, including the sources of clients' funds.
It is pertinent to note that Standard of Auditing Number 320 deals with the auditor's responsibility while planning and performing an audit of financial statements and provides for the concept of materiality. Materiality can be understood as the level at which the economic decisions of the users of financial statements can be influenced by a misstatement or an omission in such statements. It is a matter of the auditor’s professional judgment that determines the materiality, which is affected by his perception of the users’ need for such financial statements.
According to the Standards of Auditing, the auditor is entitled to set a materiality level based on his professional judgment. For instance, if he sets the standard at an amount of INR 5 lakhs, financial statements pertaining to sums greater than INR 5 lakhs will be subject to detailed/ rigorous audit, whereas those relating to sums less than the set standard, can even be processed through a mere sample audit. This loophole can potentially be used by the client who may undertake numerous transactions, say ten transactions worth INR 4 lakhs, instead of a single transaction amounting to INR 40 lakhs. Consequently, these numerous transactions would be subjected to a mere sample audit rather than a detailed scrutiny. In such a case, the accounting professional would not be at fault, technically and legally, if he/she skips the examination of sources of funds amounting to less than the materiality standard.
Imposing stringent obligations, like enhanced due diligence, deciphering the true purpose behind conducting any particular transaction, etc., upon the accounting professionals will negatively impact the ease of doing business for these professionals as it stupendously increases the volume of their work and responsibilities. Simultaneously, it will restrict the scope of their business owing to the increased scrutiny they will be subjected to; ultimately shifting a portion of their business to the legal professionals who, despite being equally complicit, have unjustifiably been kept out of the ambit of PMLA.
Moreover, the Companies Act 2013 mandates every foreign company which seeks to set up a business in India to have a local resident director. Generally, these companies appoint their local CAs to act as ad-hoc directors. Since the CAs often perform the role of formation agents for foreign companies, bringing them under the umbrella of PMLA may negatively affect foreign investments.
Lastly, the forthright categorization of accounting professionals as 'relevant persons' and of the financial transactions so carried out by them on behalf of their clients as an 'activity' has the effect of shifting the onus of proving one's innocence on the accounting professional himself, contrary to the well-accepted common law doctrine of presumption of innocence.
Suggestions and Conclusion
The inclusion of accounting professionals within the ambit of PMLA 2002 may be a bona fide step towards checking the imminence of money laundering, but it may be uncalled-for as these entities are already governed by various statutory bodies like the Institute of Chartered Accountants of India established by multiple acts of Parliament such as the Chartered Accountants Act 1949 wherein Chapter V deals with misconduct of the accounting professionals and Chapter VII deals with penalties.
Nevertheless, this inclusion must be accompanied with clearly laid down consequences and penalties specific to these professionals. This is because the involvement of the accounting professionals is only to a limited extent, is temporary and faciliatory and, therefore, subjecting them to the general punishment under the law would be unfair and disproportionate.
Lastly, since this change will potentially pose unprecedented challenges to accounting professionals, it must be implemented over a period of time and not abruptly in order to accord time to these professionals to establish the requisite mechanism.
In conclusion, even though the objective behind the amending notification may be well-founded, its implementation and compliance must not be too stringent so as to blur the line between an audit and an investigation, thereby proliferating the quantum of their work and restricting the scope of their business.