Inclusion of CA, CS and CMAs under Prevention of Money Laundering Act (PMLA)- Myths vs Facts.

[Brijesh Thakar]

Introduction

Before we understand the notification issued regarding inclusion of CAs, CS, CMAs within the ambit of Prevention of Money Laundering Act, we need to have an appropriate understanding of the concept of “money laundering” in general sense as well as legal sense.

Prevention of Money Laundering Act, 2002 is an Act passed by the Parliament of India to prevent money-laundering. Money laundering has been a major challenge for governments across the globe. To curb the money laundering activities, internationally certain steps have been taken. The International Money-Laundering Information Network (IMoLIN) is a United Nations-sponsored research center which was created to assist law enforcement agencies throughout the world in the identification of money laundering operations. The Financial Action Task Force on Money Laundering (FATF) was created as a G-7 initiative to develop more effective financial standards and anti-laundering legislation. 

What is “Money Laundering”?

1. In a simple sense, money laundering can be understood as a process used by criminals to hide the illegal (or rather criminal) source of their income. The money earned through criminal activities are passed through series of transactions and it is made to appear legal. This process may or may not involve creation of shell companies. Generally, there are three steps of this process.

(a) Initial entry or placement-  During this step an amount of money earned from criminal activity is entered into some legitimate financial network or institution. Money earned through criminal activities are deposited into banks in small amounts. This can also be shown as money earned through some legitimate businesses which usually generates high amount of cash. For example, restaurant businesses.

(b) Layering- During this step money is routed through multiple transactions in the form of sale or purchase of goods, investment etc. The layering makes it extremely difficult to trace the money back to its original source (a criminal activity).

(c) Final integration- In this step money is free to be used as it has almost lost its connection trail with the original source. The money may be placed into legitimate business or personal investment etc.

Offence of Money Laundering under PMLA and punishment for the offence

Having understood the general meaning of “money laundering”, now we can see the legal provisions related to money laundering offence and its punishment under PMLA Act. Section 3 and section 4 of the PMLA Act prescribes theses provisions which are reproduced below-

2. Section 3 Offence of money-laundering

1. As per section 3 of PMLA, 2002, 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.

Explanation.—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 acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

2.2 Readers can note that the definition of offence of money laundering is wide. Even an attempt to get involved into the activity of money laundering is covered here. However, the important deciding factor for an offence of money laundering as per section 3 is “Proceeds of Crime”. If the offence is related to “Proceeds of Crime” only then it will become an offence under section 3 of the PMLA, 2002. Hence, it becomes extremely important to understand the meaning of the phrase “Proceeds of Crime”. The phrase has been defined under section 2(1)(u) of the PMLA, 2002 as under-

section 2(1)(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.

“property” means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever located.

Explanation. —For the removal of doubts, it is hereby clarified that "proceeds of crime" include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence.

2.3 Readers can understand from the discussion made in para 2.2 above that the phrase “proceeds of crime” is linked with scheduled offences. The scheduled offences are given under the schedule to the PMLA, 2002. The explanation mentioned in para 2.2 above also clarifies that the activity may not be directly linked with the scheduled offences even if it has indirect link, it will be covered within the ambit of “proceeds of crime”.

One thing is very clear from the above discussion that to constitute an offence under section 3 of the PMLA, 2002, a person must be involved or attempting to get involved into an activity related to “proceeds of crime” and the “proceeds of crime” are properties derived from scheduled offences as per the schedule to PMLA, 2002.

2.4  The offences prescribed under the schedule to PMLA, 2002 are specific offences under certain Acts. As per schedule to PMLA certain offences under following Acts are covered-

1. Indian Penal Code, 1860
2. Narcotic Drugs and Psychotropic Substances Act, 1985
3. Explosive Substances Act, 1908
4. Unlawful Activities (Prevention) Act, 1967
5. Arms Act, 1959
6. Wildlife (Protection) Act, 1972
7. Immoral Trafficking (Prevention) Act, 1956
8. Prevention Of Corruption Act, 1988
9. Explosives Act, 1884
10. Antiquities And Arts Treasures Act, 1972
11. Securities And Exchange Board Of India Act, 1992
12. Customs Act, 1962
13. Bonded Labour System (Abolition) Act, 1976
14. Child Labour (Prohibition And Regulation) Act, 1986
15. Transplantation Of Human Organs Act, 1994
16. The Juvenile Justice (Care And Protection Of Children) Act, 2000
17. The Emigration Act, 1983
18. The Passports Act, 1967
19. Foreigners Act, 1946
20. Copyright Act, 1957
21. Trademarks Act, 1999
22. Information Technology Act, 2000
23. Biological Diversity Act, 2002
24. Protection Of Plant Varieties And Farmers Rights Act, 2001
25. The Environment Protection Act, 1986
26. Water (Prevention and Control of Pollution) Act, 1974
27. Air (Prevention and Control of Pollution) Act, 1981
28. Suppression Of Unlawful, Acts Against Safety of Maritime Navigation and Fixed Platforms on Continental Shelf Act, 2002
29. Companies Act, 2013

Offences under these specific Acts are called “Scheduled offences” and the property derived therefrom is covered under the definition of “proceeds of crime” which leads to an offence under section 3 that consequently makes a person liable for punishment under section 4.

3. Punishment for offences under Section 4 of PMLA,2002

3.1 As per section 4 of the PMLA, 2002, whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine

Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been substituted.

3.2 As per section 4 mentioned in para 3.1 above, punishment is rigorous imprisonment for a term which shall not be less than three years, but which may extend to seven years and shall also be liable to fine. For offences covered under Narcotic Drugs and Psychotropic Substances Act, 1985 (see para 2.4) the maximum imprisonment shall be ten years instead of seven years.

Issue of inclusion of CA, CS and CMA under PMLA

4. Readers have understood from above discussion in para 2 and 3 that the scope of section 3 of the PMLA, 2002 is very wide and it covers any person indulged or attempting to indulge in an activity related to “proceeds of crime”. Hence, any person whether ordinary citizen or a professional like CA or CS or CMA if involved in an offence under section 3 then he/she is liable for punishment under section 4. There has not been any exemption given to any professional person.  So, a question remains about the effect of notification issued by Ministry of Finance on 3^rd May 2023 on professionals like CA, CS and CMA. To understand the effect on the professionals, we need to understand the provisions of “reporting entity” under PMLA,2002. Before we proceed to understand the provisions regarding “reporting entity”, let us look at the text of the notification issued on 3^rd May 2023. The notification is reproduced below-

1. Text of the notification

S.O. 2036(E). —In exercise of the powers conferred by sub-clause (vi) of clause (sa) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003), the Central Government hereby notifies that the 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-

(i) buying and selling of any immovable property.

(ii) managing of client money, securities or other assets.

(iii) management of bank, savings or securities accounts.

(iv) organisation of contributions for the creation, operation or management of companies.

(v) creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities,

shall be an activity for the purposes of said sub-section.

Explanation 1.- For the purposes of this notification ‘relevant person’ includes –

(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.

Explanation 2.- For the purposes of this notification ‘firm’ shall have the same meaning assigned to it in sub-clause (i) of clause (23) of section 2 of the Income-tax Act, 1961 (43 of 1961).

4.2 Readers can see that the financial transactions carried out by relevant persons ( practising CA, CS or CMA) in relation to certain specific activities  are covered within the definition of activity under section 2(1)(sa)(vi) of the PMLA, 2002. To understand this, let us first understand the concept of “ Reporting Entity” under PMLA.

As per section 2(1) (wa) “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

The definition of “person carrying on a designated business or profession” has been given under section 2(1)(sa) as under-.

(sa) “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 (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

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

4.3 As mentioned above as per section 2(1)(sa)(vi), central government can notify a person as carrying on such other activity. Once a person is notified under this sub clause, the person shall become “reporting entity” under section 2(1)(wa). As per notification issued on 3^rd May, practising CA, CS and CMA are notified under this sub clause by government for certain financial transactions and consequently now they are covered under the definition of “Reporting Entity”. Hence the effect of the notification is that the practising chartered accountants, company secretaries and cost and works accountants are covered within the definition of “Reporting Entity”.

Responsibilities of CA, CS and CMA

5. As it is clear from above discussion that CA, CS and CMA are covered within the definition of “Reporting Entity” let us understand what it means and what will be the responsibilities of the professionals under PMLA and the consequences of not fulfilling such responsibilities. These responsibilities are given under section 11A, section 12, Section 12A and section 12AA of the PMLA.

1. Section 11A Verification of Identity by Reporting Entity

Section 11A imposes responsibility of verification of identity of client upon the reposting entity. The provisions of section 11A are as under-

(1) Every Reporting Entity shall verify the identity of its clients and the beneficial owner, by—

(a) authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016) if the reporting entity is a banking company; or

(b) offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016); or

(c) use of passport issued under section 4 of the PassportsAct, 1967 (15 of 1967); or

(d) use of any other officially valid document or modes of identification as may be notified by the Central Government in this behalf.

Hence, the CA, CS or CMA needs to have the KYCs of their clients as prescribed under section 11A. They need to make sure that the identity of the client is properly established.

2. Section 12 Reporting entity to maintain records.

Section 12 imposes responsibility on the reporting entity to maintain certain records related to financial transactions entered on behalf of the client. The provisions of section 12 are as under-

(1) Every reporting entity shall—

(a) maintain a record of all transactions, including information relating to transactions covered under clause (b), in such manner as to enable it to reconstruct individual transactions;

(b) 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;

(e) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

(2) Every information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential.

(3) The records referred to in clause (a) of sub-section (1) shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.

(4) The records referred to in clause (e) of sub-section (1) shall be maintained 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.

(5) The Central Government may, by notification, exempt any reporting entity or class of reporting entities from any obligation under this Chapter.

As professionals are now covered under the definition of reporting entity, they need to maintain the records of the financial transactions under section 12 for a period of five years. However, it is important to note that as per rules issued under PMLA, 2002 (under section 73) such records are required to be maintained for a period of ten years.

3. Section 12A. Access to information

As per provisions of section 12A, the authorised officer (director appointed under section 49 by Government) may call for records maintained by the reporting entity and the reporting entity needs to provide such records. Provisions of section 12A are as under-

(1) The Director may call for from any reporting entity any of the records referred to in section 11A, sub-section (1) of section 12, sub-section (1) of section 12AA and any additional information as he considers necessary for the purposes of this Act.

(2) Every reporting entity shall furnish to the Director such information as may be required by him under sub-section (1) within such time and in such manner as he may specify.

(3) Save as otherwise provided under any law for the time being in force, every information sought by the Director under sub-section (1), shall be kept confidential.

4. Section 12AA. Enhanced due diligence.

With effect from 1^st August 2019, the responsibilities of the reporting entity have been further enhanced by insertion of new Section 12AA. In addition to Section 11A, section 12 and Section 12A, the reporting entity needs to exercise enhances due diligence under section 12AA. Section 12AA provides as under-

(1) Every reporting entity shall, prior to the commencement of each specified transaction,—

(a) verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016) in such manner and subject to such conditions, as may be prescribed:

Provided that where verification requires authentication of a person who is not entitled to obtain an Aadhaar number under the provisions of the said Act, verification to authenticate the identity of the client undertaking such specified transaction shall be carried out by such other process or mode, as may be prescribed;

(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.

(2) Where the client fails to fulfil the conditions laid down under sub-section (1), the reporting entity shall not allow the specified transaction to be carried out.

(3) Where 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.

(4) The information obtained while applying the enhanced due diligence measures under sub-section (1) shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.

Explanation.—For the purposes of this section, "specified transaction" means—

(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 remittance

(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.

Hence, section 12AA of the PMLA imposes much higher responsibility on the reporting entity regarding doubtful financial transactions. It requires that the reposting entity (professionals included) needs to exercise enhanced due diligence regarding certain financial transactions covered under explanation to section 12AA.

5. How to maintain records and report the financial transactions

Procedure and manner of furnishing information by reporting entities has been prescribed under section 15 of the PMLA Act, 2002. As per section 15, the Central Government may, in consultation with the Reserve Bank of India, prescribe the procedure and the manner of maintaining and furnishing information by a reporting entity under section 11A, sub-section (1) of section 12 and sub-section (1) of section 12AA, for the purpose of implementing the provisions of this Act. In addition to section 15, section 73 of the PMLA gives powers to central government to make rules in this regard. By exercising powers under this section, detailed rules are issued regarding maintenance of records and furnishing the same to the authorised officer under PMLA.

Consequences of non-compliance by Reporting Entity

6. After understanding the responsibilities of professional under PMLA ( para 5 above), let us understand what shall be the consequences if the professionals fail to comply with the responsibilities imposed under PMLA

1. Section 13. Powers of Director to impose fine.

Under section 13 of the PMLA, 2002, director ( an officer authorised under section 49) has the power to impose fine on the reporting entity. Provisions of section 13 are as under-

(1) The Director may, either of his own motion or on an application made by any authority, officer or person, make such inquiry or cause such inquiry to be made, as he thinks fit to be necessary, with regard to the obligations of the reporting entity, under this Chapter.

(1A) If at any stage of inquiry or any other proceedings before him, the Director having regard to the nature and complexity of the case, is of the opinion that it is necessary to do so, he may direct the concerned reporting entity to get its records, as may be specified, audited by an accountant from amongst a panel of accountants, maintained by the Central Government for this purpose.

(1B)The expenses of, and incidental to, any audit under sub-section (1A) shall be borne by the Central Government.

(2) If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, without prejudice to any other action that may be taken under any other provisions of this Act, he may—

(a) issue a warning in writing; or

(b) direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or

(c) direct such reporting entity or its designated director on the Board or any of its employees, to send reports at such interval as may be prescribed on the measures it is taking; or

(d) by an order, impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.

(3) The Director shall forward a copy of the order passed under sub-section (2) to every banking company, financial institution or intermediary or person who is a party to the proceedings under that sub-section.

Explanation.—For the purpose of this section, “accountant” shall mean a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949).

2. Readers can observe that the authorised officer (Director) has powers to conduct inquiry regarding obligations of the reporting entity. He can order audit of records of the reporting entity. He has been given powers to impose monetary fine on the reporting entity or its employee. The minimum fine prescribed is Rs. 10,000 and maximum fine prescribed is  Rs. 100,000.

6.3   In addition to powers given under section 13, director can issue summons to any officer of the reporting entity to enforce his presence and examine him on oath under section 50. The detailed provisions of section 50 are as under-

Section 50 Powers of authorities regarding summons, production of documents and to give evidence, etc.

(1) The Director shall, for the purposes of section 13, have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit in respect of the following matters, namely:—

(a) discovery and inspection

(b) enforcing the attendance of any person, including any officer of a reporting entity and examining him on oath;

(c) compelling the production of records;

(d) receiving evidence on affidavits;

(e) issuing commissions for examination of witnesses and documents; and (f) any other matter which may be prescribed.

(2) The Director, Additional Director, Joint Director, Deputy Director or Assistant Director shall have power to summon any person whose attendance he considers necessary whether to give evidence or to produce any records during the course of any investigation or proceeding under this Act.

(3) All the persons so summoned shall be bound to attend in person or through authorised agents, as such officer may direct, and shall be bound to state the truth upon any subject respecting which they are examined or make statements, and produce such documents as may be required.

(4) Every proceeding under sub-sections (2) and (3) shall be deemed to be a judicial proceeding within the meaning of section 193 and section 228 of the Indian Penal Code (45 of 1860).

(5) Subject to any rules made in this behalf by the Central Government, any officer referred to in sub-section (2) may impound and retain in his custody for such period, as he thinks fit, any records produced before him in any proceedings under this Act:

Provided that an Assistant Director or a Deputy Director shall not—

(a) impound any records without recording his reasons for so doing; or

(b) retain in his custody any such records for a period exceeding three months, without obtaining the previous approval of the Joint Director.

4. As mentioned in para 6.1, 6.2 and 6.3 above, the professionals now being reporting entity can be subjected to provisions of section 13 and section 50 of the PMLA. Inquiry can be initiated upon the professionals like CA, CS, CMA as reporting entity, records can be asked from them, summons can be issued to them and their attendance in an inquiry can be enforced. The records can be impounded by the authority.

A protection has also been provided to reporting entity under section 14 of the PMLA. As per section 14 of the PMLA, save as otherwise provided in section 13, the reporting entity, its directors and employees shall not be liable to any civil or criminal proceedings against them for furnishing information under clause (b) of sub-section (1) of section 12.

Further, it has been provided in section 26 that the reporting entity can file an appeal to the appellate tribunal against the order passed by director under section 13(2).

Conclusion

The Prevention of Money Laundering Act, 2002 is a stringent legislation to curb the offences of Money Laundering. As we have discussed, the provisions related to “reporting entity” are now applicable to CA, CS and CMA. It shall be the responsibility of these professionals to maintain prescribed records and report the reportable transactions to appropriate authorities.  Apart from the discussion on inclusion of professionals within the scope of reporting entity, there are also some very interesting discussions on provisions of PMLA. The investigation under PMLA is done by Enforcement Directorate (ED). It has been provided that the code of criminal procedure shall be applicable to investigations and trials under PMLA. However, amendment made in the year 2019 deleted the proviso contained in Sections 17 (1) and 18 (1) and empowered the ED to undertake search actions even in the absence of a report under Section 157 of the Code of Criminal Procedure, 1973 (CrPC). The controversy regarding striking down of section 45(1) of the PMLA (conditions for bail) by Supreme Court stating it unconstitutional and its subsequent revival by amendment of the year 2018 has also been a burning issue in PMLA. However, as the scope of this article is limited to “inclusion of CA, CS, CMA under PMLA”, this controversy we will discuss in some other article in future.