Central Government vide its notification dt: May 3, 2023 and May 9, 2023 has amended the definition of ‘Persons carrying on Designated Business or Profession’ under Section 2(1)(sa) of Prevention of Money Laundering Act [‘PMLA’]. Section 2(1)(sa)(vi) of PMLA provides power to Central Government to notify Designated Business or Profession. It states as follows, “person carrying on such other activities as the Central Government may, by notification, so designate, from time to time” PMLA classifies persons carrying on a designated business or profession as Reporting Entity.
Vide these amendments Central Government has notified certain new activities and certain new activities which when carried out by certain new professionals they would be treated as Reporting Entities requiring compliances to be done with provisions of PMLA. Central Government has also included directors of companies, partners of firms, trustees of express trusts as well as nominee shareholders as “reporting entities” under the Act. Even persons arranging these officials for another person will be reporting entities. Further persons acting as formation agents of companies and limited liability partnerships (LLP) and providing a registered office, business address or accommodation, correspondence or administrative address for a company or a LLP or a trust are also designated as reporting entities. Clarification have been given by Central Government as to what all activities would be out of scope of PMLA:
- any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961 (43 of 1961); or
- any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or
- any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under clause (b) of sub-section (1) of section 7 of Companies Act, 2013 (18 of 2013); or
- any activity of a person which falls within the meaning of an intermediary as defined in clause (n) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003).
Central Government had vide its earlier notification stated that Financial transactions carried out by a Practicing Chartered Accountant or Practicing Cost and Management Accountant or Practicing Company Secretary on behalf of his client, in the course of his or her profession, in relation to (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, would have to comply with provisions of PMLA.
Reporting entity has lot of obligations under PMLA with respect to reporting of suspicious transactions, verification of authenticity of clients and keeping of records of transactions being entered. Further it also has obligations with respect to appointment of a Principal Officer or Director for conversation with Financial Intelligence Unit of India. So now these compliances that are done by Reporting Entities would have to done by Practicing Chartered Accountants, Practicing Company Secretaries and Practicing Cost and Management Accountants as Reporting Entities w.e.f May 4, 2023. Following are compliances in brief that a Reporting Entity is required to comply with:
Compliances required to be done
Reporting Entities are required to verify identity of clients and beneficial owner by offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 or use of passport issued under section 4 of the Passports Act, 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.
This provision casts responsibility on the Reporting Entity to identify beneficial owner as per PMLA. As per Rule 9(3) of PMLA Rules limit of shareholding for identifying beneficial owner is 10%.
Reporting entity will have to maintain records relating to transactions whether attempted or executed, the nature and value of which may be prescribed for a period of five years from the date of transaction between a client and the reporting entity.
Maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients. These records 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.
Reporting entity shall prior to commencement of each specified transaction verify the identity of the client based on Aadhar verification. take additional steps to examine the ownership and financial position, including sources of funds of the client. 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. This information shall be preserved by Reporting Entity for a period of five years from the date of transaction between a client and the reporting entity.
Rule of PMLA (Maintenance
of Records) Rules
Appointment of Principal Officer or Director.
So, going forward 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 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. 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 amendments are expected to aid investigative agencies further in their probe against dubious transactions involving shell companies and money laundering, experts said.
As per the FATF recommendations relating to designated non-financial businesses and professions to be followed by member countries, professionals such as lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction linked to buying and selling of real estate; 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 legal persons or arrangements, and buying and selling of business entities.
The change in PMLA law also assumes significance ahead of the proposed assessment of India under the Financial Action Task Force (FATF) expected to be undertaken later this year. The FATF is the global money laundering and terrorist financing watchdog. India’s possible onsite assessment is slated for November, while assessment is likely to come up for discussion in the plenary discussion in June next year.
Amendment to PMLA has increased onus on professionals and certain other notified entities while dealing with clients. As mentioned above compliances were already required to be done by other Reporting Entities till now, it is necessary that a similar compliance framework needs to be set up by professionals. As this is a new concept but made effective with immediate effect it is necessary that the Institute of Company Secretaries of India shall create awareness amongst practicing professional community on urgent basis.
Looking at the stringent enforcement of PMLA, every professional will have to start taking due diligence on all the assignments being handled by them right now.
Click here to Download PDF
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement