Over the last few months, the government has been undertaking changes in the money laundering law, the Prevention of Money-Laundering Act (PMLA), with the latest tweak bringing in practising chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into its ambit and allowing 22 financial entities — including Amazon Pay (India) Pvt. Ltd, Aditya Birla Housing Finance Ltd and IIFL Finance Ltd — to verify the identity of their customers via Aadhaar.
In March, the Finance Ministry amended the money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries.
In addition, it also defined “politically exposed persons” (PEPs) under PMLA as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”. The amendment was in relation to foreign PEPs and not domestic ones.
On May 3, the Finance Ministry brought in practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into the ambit of the money laundering law.
The ministry has specified financial transactions carried out on behalf of their clients by these financial professionals such as 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 that will get covered under the PMLA.
On May 4, the Finance Ministry widened the list of non-banking reporting entities to allow 22 financial entities to verify the identity of their customers via Aadhaar under the ambit of the money laundering law. Last month, the Ministry of Electronics and IT (MeitY) had proposed allowing a wide range of private entities to carry out Aadhaar authentication for a number of services, expanding the use of the digital identity beyond its ministries and departments.
Why have these changes in PMLA been undertaken?
The amendments are part of a series of changes being undertaken in the money laundering law to plug loopholes ahead of India’s proposed assessment later this year under the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.
Like in the case of the definition of PEPs, the tweak was done to define politically exposed persons under PMLA to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms.
Now, in the case of CAs, company secretaries and accountants, lawyers and legal professionals seem to have been kept out in the new definition of entities covered under the PMLA. While professionals pointed out the exclusion, officials said the changes have been made applicable only for transactions where they undertake financial transactions on behalf of their clients while regular functions like certification of accounts, and financial advice among others for a fee are not covered under this change in PMLA.
“What is being covered here is when they handle the client’s money. Service for a fee is not covered here. It is only when as a professional, he or she manages money on behalf of their client, or they carry out the function as an agent,” a senior government official said.
“Lawyers do financial transactions on behalf of their clients for selling and buying real estate etc., they may advise for formation of a company or M&As. But lawyers can’t take money for these activities. The Advocates Act bars them to act as an agent. Even CAs don’t do these either but there is no bar in their law. Practicing accountants as part of a firm are giving these services. This notification is very restrictive,” the official added.
The changes in PMLA law assume significance ahead of the proposed assessment of India under the FATF later this year. India’s possible onsite assessment is slated for November, while the assessment is likely to come up for discussion in the plenary discussion in June next year.
Due to the pandemic and the pause in the FATF’s assessment process, the fourth round of mutual evaluation of India had been postponed to 2023. Before this, the FATF had undertaken an evaluation for India in June 2010. The FATF has 40 recommendations related to anti-money laundering/counter-terrorist financing (AML/CFT) which the member countries have to comply with.
What is the response of financial professionals to these changes?
The amendments are expected to aid investigative agencies further in their probe against dubious transactions involving shell companies and money laundering, experts said. Many CAs took to social media to comment against the changes stating that auditors and legal professionals have been left out.
The changes have given rise to concerns amongst financial professionals that they could possibly not just face a penalty for non-compliance but could also have potential run-ins with investigative agencies.
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm said, “Due to a few unfortunate incidents, services such as setting up companies by CA, CS and CWA have come under PMLA. The PMLA Act is very stringent and compliance is very onerous. The conviction rate in PMLA is very low but the entire process is extremely difficult to go through. These professionals are already regulated by professional bodies set up under various Acts of Parliament and such measures are uncalled for.”
The reporting entities shall be expected to maintain the record of all transactions and would be required to furnish these to the Director (Financial Intelligence Unit). The reporting entities would also be expected to conduct KYC before the commencement of each specified transaction and will have to examine the ownership and financial position including sources of funds of the client and to record the purpose behind conducting the specified transaction, an expert, who did not wish to be named, said.
Failure to meet these requirements could invite imposition of penalty by the Director, FIU and even more action by other investigative agencies such as the Enforcement Directorate, the expert said.
A day later, however, the Institute of Chartered Accountants of India (ICAI) in a statement said it will work with authorities and will conduct an awareness programme amongst its members for the implementation of these changes in the “right perspective”.
“The FATF conducts an assessment of the implementation of anti-money laundering and counter-terrorist financing (AML/CFT standards in India. This current notification has been issued under section 2(1)(sa) of PMLA, 2002. This section defines a person carrying on a specified business or profession. This section already includes Gaming activity, Registration Authority, Real Estate Agents, Dealer in precious metals and stones. Now, CA, CS, CMA has been included in the list for certain transactions. They have now become reporting entity for the purposes of these transactions. As a reporting entity they have to do KYC of all clients entering into above transactions and to maintain record thereof”.
“ICAI will conduct an awareness programme for its members in relation to such financial transactions which are already prohibited on behalf of one’s client, in the course of his or her profession. ICAI will also continue to work with the authorities and other regulators so that these changes are implemented in the right perspective and role of Professionals is understood,” Aniket Sunil Talati, President, ICAI said.
On May 3, the Finance Ministry brought in practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into the ambit of the money laundering law. (Express Photo by Renuka Puri) 
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