Following the recommendation of the FATF, Union Budget 2023-2024 introduced KYC and PMLA provisions for cryptocurrency, and related services. Banks, FIs, Crypto Exchanges, Jewelers, and Real Estate Agents were made Reporting Entities under PMLA.
Subsequently, the Ministry of Finance vide Notification dated May 03, 2023 (‘Notification’) 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 has brought practicing corporate professionals (CAs, CSs, CMAs) under the ambit of 'Reporting Entities' 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 practicing corporate professionals as being “reporting entities”. However, a finer reading suggests that only such professionals, who are carrying out specified financial transactions on behalf of their clients, are covered as reporting entities (RE).
On a conjoint reading of the notification with sec. 2(1)(sa) of PMLA, it seems that a person is regarded as a “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 practicing CA, practicing CS, or practicing CMA;
The professional is carrying out financial transactions. “Financial transactions” obviously imply transactions involving financing or investment activity;
These financial transactions are transactions being carried out 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 the 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 the use of 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 that 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.
The government has also brought GSTN under PMLA ambit on July 07, 2023. The government is also considering to include Lawyers in the ambit of the said notification requiring them to flag clients' shady transactions under PMLA. However, this may require a change in law and cannot be given effect by a mere notification as it may adversely impact client-attorney privilege and fiduciary relationship.
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 and 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.
The ICSI on 11-Oct-2023 clarified that charging professional fees, receiving money from clients for Government or legal dues etc. would not be construed as Financial Transactions.
