We have oftentimes come across news items wherein doctors and other persons in the medical profession have been charged of negligence under the Consumer Protection law, leading to them being more cautious in their work. Now, it is the turn of professionals like Company Secretaries (CS), Chartered Accountants (CA) and Cost Accountants (CMA) to be more cautious in the performance of their professional duties as a government notification dated 3rd May 2023 have brought all these three professions within the ambit of a much-dreaded law – the Prevention of Money Laundering Act, 2002 or simply the PMLA. So, what does it really mean for the professionals? Why do they tend to suddenly feel being in deep water now? In this article, I will elaborate on the scope and objective of this Act and the enhanced responsibility put on the shoulder of these professionals to curb money laundering in the country.
In order to set the tone for discussion on this topic, let us first dive a little deeper into what the PMLA is all about. So let us have a look at some important points from the Act.
Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002, which, along with the rules framed thereunder, came into force w.e..f. 1st July, 2005, was enacted by the Parliament of India with a view to preventing the heinous activity of money-laundering in the country. The idea behind was to aid the global efforts against money laundering and related crimes. With a view to combatting such illegal activities, apart from strict punishment, including imprisonment, the Act also provided for confiscation of any property acquired from or through laundered money.
Definition of Money Laundering
Section 3 of PMLA defines the term as follows:
“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.
(i) For the removal of doubts, it is hereby clarified that – (i) a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely – (a) concealment or (b) possession or (c) acquisition or (d) use or (e) projecting as untainted property or (f) claiming as untainted property in any manner whatsoever
(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever – Section 3 of Prevention of Money Laundering Act as amended w.e.f. 1-8-2019.
*The explanations were added in an amendment in 2019.
Where a certain transaction involves two or more transactions that are inter-connected and one or more of such transactions are found to have involved money laundering, then the other transactions shall also be presumed to come under money-laundering as inter-connected transactions and accordingly shall be subject to adjudication or confiscation.
Financial Intelligence Unit – India (FIU-IND)
This unit was set by the Government of India in 2004 as a central agency to receive, process, analyse and disseminate information relating to financial transactions alleged to be related to money laundering. It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister of India. Under the PMLA Act and Rules, banking companies, financial institutions and intermediaries are under obligation to verify the identity of clients, to maintain records and furnish necessary information in prescribed format to the Financial Intelligence Unit - India, in short, the FIU-IND.
Person Carrying on Designated Business or Profession
Section 2(1)(sa) defines “person carrying on designated business or profession”. Until before the notification under discussion, the following persons were included within the definition:
(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;
(ii) Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government;
(iii) real estate agent, as may be notified by the Central Government;
(iv) dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government;
(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or
Sub-section 2(1)(sa)(vi) authorises the Central Government to designate by notification when certain other activities performed for or on behalf of another natural or legal person will come under the ambit of money laundering, or in other words, to designate other persons carrying on designated business or profession. Notification number S.O. 2036(E) was issued under this provision on 3rd May 2023 to include in the definition of “person carrying on designated business or profession” a ‘relevant person’ carrying on certain activities on behalf of their client shall be. The term ‘relevant person’ has been defined in the explanation to mean a practising Company Secretaries (CS), a practising Chartered Accountants (CA) and a practising Cost Accountants (CMA). Hence CSs, CAs and CMAs are now persons carrying on designated business or profession.
Section 2(1)(wa) of PMLA defines ‘reporting entity’ as a banking company, financial institution, intermediary or a person carrying on a designated business or profession. The role of a reporting entity under PMLA is the following:
Maintenance of records of all transactions in such manner as to enable it to reconstruct individual transactions (for a period of five years from the date of transaction between a client and the reporting entity)
Furnish to the Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed
Maintenance of record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients (for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later)
Every information maintained, furnished or verified, except as otherwise provided under any law for the time being in force, shall be kept confidential by the Reporting Authority. The Director under the Act may call for from any reporting entity any of the above records and the reporting entity is required to furnish to the Director such information within such time and in such manner as may be specified. Every such information sought by the Director must be kept confidential.
Section 12AA of PMLA requires the reporting authority to ensure enhanced due diligence prior to commencement of each specified transaction as follows:
(a) verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar
(b) take additional steps to examine the ownership and financial position, including sources of funds of the client, in such manner as may be prescribed
(c) take additional steps as may be prescribed to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties
In case if the client fails to fulfil the conditions listed above, the reporting entity must not allow the specified transaction to be carried out.
If any specified transaction or series of specified transactions undertaken by a client is considered suspicious or likely to involve proceeds of crime, the reporting entity shall increase the future monitoring of the business relationship with the client, including greater scrutiny or transactions in such manner as may be prescribed.
The information obtained while applying the enhanced due diligence measures must be maintained by the reporting authority for a period of five years from the date of transaction between a client and the reporting entity.
Explanation u/s 12AA defines ‘specified transaction’ to mean—
(a) any withdrawal or deposit in cash, exceeding such amount;
(b) any transaction in foreign exchange, exceeding such amount;
(c) any transaction in any high value imports or remittances;
(d) such other transaction or class of transactions, in the interest of revenue or where there is a high risk or money-laundering or terrorist financing, as may be prescribed.
Onus or burden of proof
Where a person is accused of being involved in money laundering, the onus is on him to prove that the alleged proceeds of crime have actually been lawfully acquired by them.
Punishment for money-laundering
The PMLA prescribes a punishment of 3 to 7 years rigorous imprisonment to any person found guilty of money-laundering. However, if the offence also comes within the ambit of Narcotic Drugs and Psychotropic Substance Act, 1985, the maximum term of rigorous imprisonment shall be 10 years.
Attachment of property
The property acquired by using the proceeds of crime or the laundered money can be confiscated by the Adjudicating Authority.
In terms of sub-section (1) of section 6 of the PMLA, an Adjudicating Authority has been constituted to exercise jurisdiction, powers and authority conferred by or under this Act. The Adjudicating Authority under PMLA has powers to regulate its own procedure and is not bound by the procedures laid down in the Code of Civil Procedure,1908.
Section 25 of the PMLA mandated the Central Government to establish an Appellate Tribunal to hear appeals against the Adjudicating Authority and other authorities under the Act. The section was amended in 2016 to provide that the Appellate Tribunal constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (SAFEMA) shall be the Appellate Tribunal for hearing appeals against the orders of the Adjudicating Authority and the other authorities under the PMLA also. This Appellate Tribunal under (SAFEMA) is one of the earliest tribunals in the country and also hears appeals under the Sea Customs Act, 1878, the Customs Act, 1962, the erstwhile FERA, 1947, the FERA, 1973, and those related to persons detained under the COFEPOSA whose detention orders were neither revoked by the Government nor set aside or quashed by the courts of competent jurisdiction, subject to the conditions specified in Section 2 of the Act. Orders of this tribunal can be appealed against in the appropriate High Court and finally to the Supreme Court.
Notification dt. 3rd May 2023
Sub-section 2(1)(sa)(vi) authorises the Central Government to designate by notification when certain other activities performed for or on behalf of another natural or legal person will come under the ambit of money laundering. Under this provision, on 3rd May 2023, notification number S.O. 2036(E) has been issued by the Ministry of Finance, Department of Revenue, Government of India. As per this notification, the below-mentioned financial transactions carried out by a ‘relevant person’ on behalf of their client shall be considered as an activity relating to money laundering. The term ‘relevant person’ has been defined in the explanation to mean a practising Company Secretaries (CS), a practising Chartered Accountants (CA) and a practising Cost Accountants (CMA).
The following financial transactions have been identified in the notification:
Buying and selling of any immovable property;
Managing of client money, securities or other assets;
Management of bank, savings or securities accounts;
Organisation of contributions for the creation, operation or management of companies;
Creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.
Hence, going forward practising CSs, CAs and CMAs will be covered under the scanner as and when they execute any financial transactions on behalf of a client. Members belonging to all the three professions are on thin ice now. Their vigilance, carefulness, due-diligence and strict professionalism will be tested more rigorously from now on.
The new notification under PMLA is a bold step of the government towards speeding up its battle against anti-money laundering activities. The new provisions are expected to help probing against dubious transactions by shell companies involved in money laundering. But by providing an inclusive definition of ‘relevant person’ to include these three professions only, the government has clearly shown its intent of keeping practising advocates or any other person out of the net, although they might also be in the position to do any of the financial transactions identified in the notification as connected to money laundering, on behalf of the client. However, the more optimistic thinking on the part of these professionals would be to consider this move as a reassurance of the reliance the government has always had on these three professions, this time in its battle against money laundering. The proof of this can be found in section 2(1)(wa) of PMLA which now includes these three professions within the meaning of a ‘reporting entity’. Reporting authorities are mediums in the hands of the government for gaining information about dubious transactions. So, CS, CA and CMAs are now expressly clothed with the responsibility of being whistle blowers in case they come across any such transactions. If they are not careful enough, they will be hauled up for being partners in the crime of money laundering by their clients. If professionals have been handling the money of the client for financial transactions on their behalf whether in India or abroad, now it is a better idea for them to stay away from doing so.
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