Practicing professionals as reporting entities under PMLA

Ministry of Finance notification notifies certain client transactions by CA, CS and CMAs for money laundering law

– Team Finserv | finserv@vinodkothari.com

Brief Background

The Ministry of Finance vide notification dated May 03, 2023 (‘Notification’) has widened the ambit of the term “Reporting Entity” as defined in Section 2(1)(wa), read with sec. 2 (1)(sa) of the Prevention of Money Laundering Act, 2002 (‘PMLA’). The Notification, which has already created a lot of flutter, seems to bring practising corporate professionals (CAs, CSs, CMAs), if the said corporate professionals are carrying certain “financial transactions” on behalf of their clients.

At its first reading, one may either take a very aggressive view, to regard all practising corporate  professionals as being “reporting entities”. However, a finer reading suggests that only such professionals, who are carrying specified financial transactions on behalf of their clients, are covered as reporting entities. We discuss this below.

Our YouTube video on the topic discussing the changes brought in by the said notification and its implications is available here – https://www.youtube.com/watch?v=hWdeFfVcnQM

Who is a Reporting Entity?

As per Section 2(1)(wa) of the PMLA means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

Further, Section 2(1)(sa) of the PMLA, defines “person carrying on designated business or profession” means,—

(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 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

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time

As per the powers conferred under the aforesaid clause (vi), the Central Government has notified 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:

• 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

As the language of the aforesaid notification stipulates “financial transactions carried out by a relevant person..” the Ministry of Finance has explained who all are considered as Relevant Person by defining it to include:

(i) an individual who obtained a certificate of practice under section 6 of the Chartered Accountants Act, 1949 (38 of 1949) and practicing individually or through a firm, in whatever manner it has been constituted;

(ii) an individual who obtained a certificate of practice under section 6 of the Company Secretaries Act, 1980 (56 of 1980) and practicing individually or through a firm, in whatever manner it has been constituted;

(iii) an individual who has obtained a certificate of practice under section 6 of the Cost and Works Accountants Act, 1959 (23 of 1959) and practicing individually or through a firm, in whatever manner it has been constituted.

Placing the Notification into the language of sec. 2 (1) (sa) of PMLA, the combined reading could be read as follows:

“person carrying on designated business or profession” means,—

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(vi) person carrying on the following activities, that is, financial transactions carried out by a practising CA, practising CS or a practising CMA, on behalf of his/her client, in the course of his or her profession, in relation to the following activities:

• 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, such professionals, carrying such financial transactions, will be taken to be reporting entities and shall be required to ensure the necessary compliances accordingly.

What are the conditions for being covered by the 3rd May Notification?

On a conjoint reading of the notification with sec. 2(1)(sa) of PMLA, it seems that a person is regarded as “person carrying designated business or profession”, only if such person is carrying the specified activities as notified in the Notification on behalf of his client.

Thus, it seems that the following conditions need to be satisfied for a corporate professional to be covered by the definition of “reporting entity”

• It must be a practising CA, practising CS, or practising CMA;
• The professional is carrying financial transactions. “Financial transactions” obviously imply transactions involving financing or investment activity;
• These financial transactions are transactions being carried by the corporate professional “on behalf of his client”. This implies that the real beneficiary or the stakeholder in the transaction is a client, but the transaction is being carried out by the corporate professional;
• Mere professional services, for example, incorporation of companies, or rendering professional services relating to management of companies, cannot be said to be “financial transactions”. The word “financial transactions” refers to the use of money – for instance, capital contribution, deployment of funds into properties, capital market, sourcing of funds, etc. While interpreting the Notification, one cannot lose sight of the purpose of PMLA – which is to curb money laundering and terrorist activities. If there is a transaction involving a client’s use of funds or sourcing of funds, and the transaction is suspicious and may have implications relating to use of the money for money laundering or promotion of terrorism, then a professional, carrying such transaction, cannot (i) contend that he is not aware of the credentials of his client, because he is required to carry due diligence on his client; and (ii) if he is able to notice transactions which require reporting to the FIU IND, the professional must do  the same.

What is the intent behind the said notification and inclusion of practicing professionals as RE?

More than throwing a compliance obligation on corporate professionals, the real implication of the Notification will be to throw the onus on corporate professionals for dubious transactions handled by such professionals. It is a commonly noted unfortunate fact that wherever there are dubious money laundering transactions, there may be high chances of involvement of a corporate professional, in some way or the other. Such professionals may thus, be engaged to launder money and bring the same into official channels, or to invest dubiously accumulated funds into some form of immovable property, or other investments.

The Notification throws serious obligations to corporate professionals, as they have been subjected to multiple obligations – to carry out due diligence on their clients, and to report them if they become aware of suspect transactions.

What are the major obligations of reporting entities?

Once identified as the Reporting Entity, the PMLA 2002 read with the PMLA (Maintenance of Records) 2005 imposes a certain set of obligations. These obligations include:

• Verification of the identity of its clients and the beneficial owner before entering into a financial transaction;
• Maintenance of records^[1] for a period of five years of the transactions executed on behalf of the clients and their identity;
• Certain other obligations vis a vis furnishing information to the Financial Intelligence Unit(FIU).

The first two obligations would not be something new to the ‘relevant person’;  however, the insertion of obligating information to the FIU would be completely an additional set of compliance. As per Rule 7 of PMLA (Maintenance of Records) Rules 2005, the specified practicing professionals would have to consider and undertake the following actions:

• Appoint a Designate Director and Principal Officer
• Communicate the name of such Designated Director and Principal Officer to the Director of FIU

Post appointing the Principal Officer and Designated Director, it will have to further continuously i.e.15th day of the succeeding month:

• Evolve an Internal mechanism for detecting; and
• Furnishing information on the transactions specified in Rule 3(1) of the PMLA (Maintenace of Records) Rules 2005.

Concluding Remarks

The inclusion of practicing professionals undertaking financial transactions on behalf of clients, recognises the fact that professionals may aid or be a part in the process of money-laundering involving proceeds of crime and hence, the notification may be a step in the right direction. However, it will be important to point out that not all transactions undertaken by practicing professionals would come within the scope of PMLA.

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^[1]  Rule 3(1) of the PMLA (Maintenance of Records) Rules 2005 prescribes a threshold for:

Cash Transactions: 10 lakhs and

Cross Border Wire Transfer & Purchase/Sale of Immovable Property: 50 Lakhs