Professionals-CAs/CMAs/CSs & AML/CFT

 

In October 2021, the Financial Action Task Force (FATF) adopted minor amendments to Recommendation 23 and the FATF Glossary to clarify how the existing requirements in Recommendation 18 to implement group-wide programmes against money laundering and terrorist financing apply to Designated Non-Financial Businesses and Professions (DNFBPs).

Under the FATF Glossary DNFBPs mean: 

a) Casinos; 

b) Real estate agents; 

c) Dealers in precious metals; 

d) Dealers in precious stones; 

e) Lawyers, notaries, other independent legal professionals and accountants; and 

f) Trust and Company Service Providers.

Financial Group’

The FATF Glossary defines a financial group as a group that consists of a parent company or of any other type of legal person exercising control and coordinating functions over the rest of the group, together with branches and/or subsidiaries that are subject to AML/CFT policies and procedures at the group level.

‘DNFBP group’’ Vs   ‘other DNFBP structures’

A ‘DNFBP group’ operates under the same structures as a financial group (i.e., parent/subsidiary-branch structure). ‘Other DNFBP structures’ do not operate like financial groups but they share common ownership, management or compliance control.

A group-wide programme is a holistic AML/CFT risk assessment and management across a group or structure. These requirements are set out in R.18 and its Interpretative Note and may include group-wide policies and procedures, group risk assessment, the appointment of a group compliance officer and group audit functions.

Significance of the role professionals play in Economic Growth

Significance of the role professionals play in economic growth are:

• CAs perform the accounting and audit function, preparation of financial statements which are used by stakeholders, creditors and investors to assess the financial health of the business, besides helping businesses in complying with the accounting standards and regulations.
• CSs help in complying with corporate governance regulations which ensure that the businesses are running in an accountable and transparent way. They also help businesses to prepare annual reports and other corporate documents.
• CWAs help in calculating the cost of production, which can be used for setting up the prices and make other business-related decisions. They also help in making decisions which can be helpful in identifying the areas where costs can be reduced.

Around the world, cases of financial fraud have not only hurt investor trust but also damaged the reputations of well-known accounting firms. These scandals, ranging from fake records to deliberate cover-ups, reveal serious flaws in the corporate and auditing systems. The impact is often devastating, affecting businesses, investors, and economies alike.

The most notorious accounting fraud case is the Lehman Brothers scandal. The global financial services firm hid over $50 billion in loans disguised as sales.

Taking advantage of a loophole in the accounting standard language regarding repurchase agreements, they sold toxic assets to Cayman Island banks, understanding that they would eventually be bought back. The scandal was exposed in September 2008 when Lehman brothers filed for bankruptcy.

 

Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth, Inc.; the merged company, HNG InterNorth, was renamed Enron in 1986, based out of Houston, Texas.

The Enron scandal is the biggest accounting fraud in history which led to the introduction of the Sarbanes-Oxley Act in 2002 and the dismantling of the then Big five accounting firm Arthur Andersen. Enron, once a highly respected energy company, used complex accounting techniques like mark-to-market accounting and special purpose entities (SPEs) to hide its financial losses and inflate profits. The scandal resulted in shareholders losing over $74 billion as Enron’s share price collapsed from around $90 to under $1 within a year.

India has seen its share of high-profile financial scams over the years, affecting both individuals and institutions.

Born in India and raised in the Belgian city of Antwerp, the diamond capital of the world, Nirav Modi is a third-generation diamantaire. After dropping out of the University of Pennsylvania’s Wharton School, he joined the family business of his maternal uncle Choksi at Gitanjali Gems.

Nirav Modi shot to prominence in the past decade when he became the first Indian to feature on the cover of a Christie’s auction catalogue in 2010 for a Golconda diamond necklace that fetched $3.56 million at its auction in Hong Kong.

Companies owned by diamond merchants Nirav Modi and Mehul Choksi are alleged to have swindled Punjab National Bank (PNB) of over Rs 11,000 crore ($1.77 billion). The scam was detected in the third week of January 2018, according to the PNB management which approached the Central Bureau of Investigation on Jan. 29. The agency had seized over 34,000 pieces of jewellery worth Rs 85 crore from Gitanjali Group, owned by Nirav Modi's uncle and jeweller Mehul Choksi, also wanted in this case.

 

The founder of Satyam Computers, Ramalinga Raju, confessed to falsifying the company’s accounts in 2009. He inflated the company’s earnings and assets for years to show profitability and attract investors. Raju also manipulated the books by non-inclusion of certain receipts and payments, resulting in an overall misstatement to the tune of Rs 12,318 crore, shows an analysis of findings of Sebi’s probe. As many as 7,561 fake bills which were even detected in the company’s internal audit reports and were furnished by one single executive. The company’s stock price plummeted when the fraud was uncovered, causing massive losses.

This scam led to stricter corporate governance norms in India and the takeover of Satyam by Tech Mahindra.

 These and similar scams have happened across the globe and it  is towards this background, one needs to understand why DNFBPs are needed to be covered under AML/CFT. FATF recommendation 22, 23 and respective Interpretive Notes provide basis for a nation to put in controls for AML/CFT. Ensuring adherence to AML and CFT regulations not only safeguards DNFBPs from potential legal and reputational risks but also fortifies the global financial system against the threats of illicit financial activities.

FATF and DNFBPs

Recommendation 16

 

Recommendation 16 places reporting obligations on certain DNFBPs, such as lawyers, notaries, and accountants, when they engage in or assist clients with high-risk activities. These professionals are required to report suspicious transactions on behalf of their clients. Additionally, dealers in precious stones are obligated to report suspicious transactions when conducting cash transactions exceeding a prescribed threshold with a customer.

 

Recommendation 22: DNFBPs: Customer Due Diligence

The customer due diligence and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17, apply to designated non-financial businesses and professions (DNFBPs) in the following situations:

(a) Casinos – when customers engage in financial transactions equal to or above the applicable designated threshold.

(b) Real estate agents – when they are involved in transactions for their client concerning the buying and selling of real estate.

(c) Dealers in precious metals and dealers in precious stones – when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.

(d) Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

• 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.

(e) Trust and company service providers – when they prepare for or carry out transactions for a client concerning the following activities:

• Acting as a formation agent of legal persons;
• Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;
• Providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;
• Acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another form of legal arrangement;
• Acting as (or arranging for another person to act as) a nominee shareholder for another person.

INTERPRETIVE NOTE TO RECOMMENDATIONS 22 AND 23 (DNFBPS)

1. The designated thresholds for transactions are as follows:

• Casinos (under Recommendation 22) - USD/EUR 3,000
• For dealers in precious metals and dealers in precious stones when engaged in any cash transaction (under Recommendations 22 and 23) - USD/EUR 15,000. Financial transactions above a designated threshold include situations where the transaction is carried out in a single operation or in several operations that appear to be linked.

2. The Interpretive Notes that apply to financial institutions are also relevant to DNFBPs, where applicable. To comply with Recommendations 22 and 23, countries do not need to issue laws or enforceable means that relate exclusively to lawyers, notaries, accountants and the other designated non-financial businesses and professions, so long as these businesses or professions are included in laws or enforceable means covering the underlying activities.

INTERPRETIVE NOTE TO RECOMMENDATION 22 (DNFBPS – CUSTOMER DUE DILIGENCE)

1. Real estate agents should comply with the requirements of Recommendation 10 with respect to both the purchasers and vendors of the property.

2. Casinos should implement Recommendation 10, including identifying and verifying the identity of customers, when their customers engage in financial transactions equal to or above USD/EUR 3,000. Conducting customer identification at the entry to a casino could be, but is not necessarily, sufficient. Countries must require casinos to ensure that they are able to link customer due diligence information for a particular customer to the transactions that the customer conducts in the casino.

Professionals- CAs/CMAs/CSs & AML/CFT in India

Chartered Accountants(CAs), Company Secretaries(CSs), and Cost & Management Accountants (CMAs) now under the Prevention of Money Laundering Act assume significance ahead of the proposed assessment of India under the FATF later this year 2023. 

Chartered Accountants (CAs)

 CAs are governed by professional guidance from the Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, viz. The Chartered Accountants Act, 1949 (Act No.XXXVIII of 1949) for regulation and development of the profession of Chartered Accountants in the country. The Institute, functions under the administrative control of the Ministry of Corporate Affairs, Government of India. The ICAI is the largest professional body of Chartered Accountants in the world, with a strong tradition of service to the Indian economy in public interest.

The affairs of the ICAI are managed by a Council in accordance with the provisions of the Chartered Accountants Act, 1949 and the Chartered Accountants Regulations, 1988. The Council constitutes of 40 members of whom 32 are elected by the Chartered Accountants and remaining 8 are nominated by the Central Government generally representing the Comptroller and Auditor General of India, Securities and Exchange Board of India, Ministry of Corporate Affairs, Ministry of Finance and other stakeholders.

Over a period of time the ICAI has achieved recognition as a premier accounting body not only in the country but also globally, for maintaining highest standards in technical, ethical areas and for sustaining stringent examination and education standards. Since 1949, the profession has grown leaps and bounds in terms of members and student base.

ICAI recommends the accounting standards to be followed by companies in India to NFRA

The Functions of ICA

• ICAI Council: Affairs of the Institute is undertaken by a Council constituted under the Chartered Accountants Act, 1949
• The Council constitutes of 40 members of whom 32 are elected by the Chartered Accountants and remaining 8 are nominated by the Central Government generally representing the CAG, SEBI, Ministry of Corporate Affairs, Ministry of Finance and other stakeholders.
• The elected members of the council are elected under the single transferable vote system by the members of the institute.
• The Council functions through its 4 Standing Committees and 37 Non-Standing Committees

• Membership: Members of the Institute are known as Chartered Accountants (CA). Becoming a member requires passing the prescribed examinations, three years of practical training and meeting other requirements under the Act and Regulations. Functions of CA are following:
• Chartered Accountants enjoy a statutory monopoly in audit of financial statements under the Companies Act, 2013, Income Tax Act, 1961.
• Areas of expertise include Financial Reporting, Auditing and Assurance, Corporate Finance, Investment Banking, Financial Modelling, Equity Research. Fund Management, Credit Analysis, Capital Markets, Arbitration, Risk Management, Economics, Strategic/Management Consultancy, Management Accounting, Information Systems Audit, Corporate Law, Direct Tax, Indirect Tax and valuation of businesses.

• Accounting Research Foundation (ARF): ICAI Accounting Research Foundation (ICAI ARF) has undertaken and completed various basic and applied research projects.
• It also provides financial assistance to researchers / scholars for undertaking basic research projects of contemporary national/ international significance in the aforesaid areas.
• ICAI provides technical advice and necessary inputs on matters of economic relevance and alike to various Ministries such as Ministry of Corporate Affairs, Ministry of Commerce & Industry, Ministry of Finance, Ministry of Railways etc.
• ICAI also provides technical advice to various bodies such as – Comptroller and Auditor General of India, Controller General of Accounts, Reserve Bank of India, Securities and Exchange Board of India, Central Board of Direct Taxes, Central Board of Excise & Customs, GST Council, Insurance Regulatory & Development Authority etc.
• It has provided comprehensive suggestions at each stage of GST implementation, be it Constitutional Amendment Bill, Model GST Law, Revised Model GST Law, Draft GST Rule or Post implementation of GST.

• Indian Institute of Insolvency Professionals of ICAI (IIIPI), a wholly owned subsidiary of the ICAI, is a Section 8 Public Company established to enrol and regulate insolvency professionals as its members in accordance with the Insolvency and Bankruptcy Code, 2016 read with regulations and rules incidental thereto.

• Quality Review Board: Under Section 28A of the Chartered Accountants Act, 1949, as inserted by the Chartered Accountants (Amendment) Act, 2006, the Central Government is empowered to constitute a Quality Review Board consisting of a Chairperson and ten other members.
• The Board reviews and recommends to the Council of the ICAI with regard to the quality of services provided by the members of Institute including audit services.

• Disciplinary Mechanism: The Disciplinary Directorate, the Board of Discipline, and the Disciplinary Committee form the foundation of the disciplinary process of the ICAI. These entities are quasi-judicial and have substantial powers like that of a Civil Court to summon and enforce attendance or require discovery and production of documents on affidavit or otherwise.

• International Affairs: The International Affairs Committee of ICAI has the multi fold objective of positioning brand Indian CA at the global level by establishing Qualification Recognition Arrangements with accounting bodies (like The Institute of Chartered Accountants in England and Wales(ICAEW), Certified Public Accountants of Australia(CPA Australia) etc.).

The National Financial Reporting Authority (NFRA) 

NFRA is an Indian body provided in Companies Act 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors.The National Financial Reporting Authority (NFRA) was constituted on 01st October,2018 by the Government of India under Sub Section (1) of section 132 of the Companies Act, 2013.

Functions and Duties

As per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:

Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government;

Monitor and enforce compliance with accounting standards and auditing standards;

Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;

Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

Sub Rule (1) of Rule 4 of the NFRA Rules, 2018(view:1MB)   , provides that the Authority shall protect the public interest and the interests of investors, creditors and others associated with the companies or bodies corporate governed under Rule 3 by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors.

Companies and Bodies Corporate Governed by the Authority

As per rule 3 of the NFRA rules,2018 (view:1MB)  , the Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 (view:1MB)   or undertake investigation under sub-section (4)(view:1MB)    of such section of the auditors of the following class of companies and bodies corporate, namely:-

Companies whose securities are listed on any stock exchange in India or outside India;

Unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;

Insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with  clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 (view:1MB)  of the Act;

Any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and

A body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or networth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).

 

As per the Companies Act, 2013 the NFRA is tasked with the job of recommending accounting and auditing standards, ensuring compliance with them and overseeing the quality of service of the accounting and audit professions.

It has also been given the power to investigate matters of professional misconduct by chartered accountants or CA firms, impose penalty and debar the CA or firm for up to 10 years.

Cost & Management Accountants 

ICAI’s expertise and specializations is well acknowledged as the domain of financial accounting audit and taxation, whereas the primary focus of the Institute of Cost Accountants is costing, management accounting and internal reporting , cost measurement and analysis for decision making and ensuring organizational sustainability which is also well recognized by the society

Institute of Cost & Management Accountants(ICMAI) 

The Institute of Cost Accountants of India (erstwhile The Institute of Cost and Works Accountants of India) was first established in 1944 as a registered company under the Companies Act with the objects of promoting, regulating and developing the profession of Cost Accountancy.

On 28th May, 1959, the Institute was established by a special act of Parliament, namely, the Cost and Works Accountants Act, 1959 as a statutory professional body for the regulation of the profession of cost and management accountancy.

It has since been continuously contributing to the growth of the industrial and economic climate of the country.

The Institute of Cost Accountants of India is the only recognised statutory professional organisation and licensing body in India specialising exclusively in Cost and Management Accountancy.

A Cost Accountant is a person who offers to perform or perform services involving the costing or pricing of goods and services or the preparation, verification or certification of cost accounting and related statements.

The head office is situated at 12, Sudder Street, Kolkata 700 016 and operates through four regional councils are Kolkata, Chennai, Delhi and Mumbai as well as through a number of important chapters situated elsewhere in India and abroad.

The 2011 amendment changed the name “The Institute of Cost and Works Accountants of India (ICWAI)” to The Institute of Cost Accountants of India (ICAI) and created confusion in the professional world as its acronym ICAI reflected the Chartered Accountancy professions’ institute.

Government of India, by virtue of the passing of ICWAI Amendment Act 2011, enabled (Jan 19, 2012) their members to use the designation ACMA and FCMA denoting Associate and Fellow membership of the Institute respectively. This will enable the members working in India and abroad, being recognized by a common designation by which similar members are known throughout the globe. As of May 12, 2023, the issue is unresolved by central govt, but the ICWAI already moved on with  the acronym ICMAI and carries its activities as usual.

Objectives of the Institute

To develop the Cost and Management Accountancy function as a powerful tool of management control in all spheres of economic activities.

To promote and develop the adoption of scientific methods in cost and management accountancy.

To develop the professional body of members and equip them fully to discharge their functions and fulfill the objectives of the Institute in the context of the developing economy.

To keep abreast of the latest developments in the cost and management accounting principles and practices, to incorporate such changes are essential for sustained vitality of the industry and other economic activities.

To exercise supervision for the entrants to the profession and to ensure strict adherence to the best ethical standards by the profession.

To organise seminars and conferences on subjects of professional interest in different parts of the country for cross-fertilisation of ideas for professional growth.

To carry out research and publication activities covering various economic spheres and the publishing of books and booklets for spreading information of professional interest to members in industrial, education and commercial units in India and abroad.

Company Secretaries

The Institute of Company Secretaries of India (ICSI) is a premier professional body, established under an act of Parliament (The Company Secretaries Act, 1980), to regulate and develop the profession of Company Secretaries. ICSI functions under the jurisdiction of the Ministry of Corporate Affairs, Government of India. The Institute provides top-quality education to the students of Company Secretaries (CS) Course and best quality set standards to CS Members.

Headquartered in New Delhi, the ICSI has a nationwide presence with four Regional Offices in New Delhi, Chennai, Kolkata and Mumbai, 73 Chapter Offices spread all across the country and Centre for Corporate Governance, Research and Training (CCGRT) in Mumbai, Hyderabad and Kolkata. The Institute also has six overseas centres at Australia, Canada, Singapore, UAE, UK and USA. With over 75,000 members and around 200,000 students, the ICSI has the largest membership and student base of Company Secretaries in the world.

As an inclusive body on the global governance map, the ICSI has been taking various initiatives for the growth and development of the profession. ICSI has been contributing to the initiatives of Government of India that have potential to excel the social-economic growth of India.

Further, as per the guidelines, ICSI has been has been advised to take on the role of Supervisory Regulatory Body (SRB) for its practising members i.e. Company Secretary in Practice. For the purpose of interaction and information sharing between practicing members and FIU-India, a nodal officer is also identified as per the requirement of guidelines who can be reached at pmla@icsi.edu. As per the abovementioned Guidelines, the ICSI is required to identify the existing Reporting Entities undertaking financial transactions as listed under the notification dated May 03, 2023.

PMLA 2002 & CAs/CMAs/CSs

India, as a member of the Financial Action Task Force (“FATF”), is actively participating in developing and promoting policies against money laundering, terrorist financing, and the financing of weapons of mass destruction. In line with FATF’s objectives, member countries review each other’s anti-money laundering legislations. India is actively prioritizing compliance with FATF Recommendations as its upcoming mutual evaluation is tentatively scheduled for the end of this year. Particularly, Recommendation 22 urges member countries to include lawyers, notaries, independent legal professionals, and accountants involved in the activities mentioned below in Notification dated May 3, 2023 as “Reporting Entities”. Recommendation 22 also addresses the treatment of trusts and company service providers as reporting entities. The Centre has been enhancing reporting guidelines of accountants and disclosure regulations by companies as part of its efforts to improve corporate governance practices, and to check generation of unaccounted wealth, diversion of funds from businesses, bogus inter-corporate transactions and laundering of funds.

The PMLA   mandates the establishment of a three-tiered structure comprising the Financial Intelligence Unit-India (FIU-IND), the designated authority, and reporting entities. Reporting entities, which include banks, financial institutions, and designated nonfinancial businesses and professions, play a crucial role in the implementation of the PMLA

 

The Prevention of Money Laundering Act, 2002 (PMLA) aims to prevent money laundering and enable the confiscation of property associated with such activities. By including these professions under the purview of the Prevention of Money Laundering Act, the government aims to strengthen efforts in preventing money laundering activities and illegal financial practices. This step ensures greater compliance and accountability among professionals involved in financial transactions, providing added protection for clients against potential abuse or fraud.

 

The notification under the Prevention of Money Laundering Act, 2002 (PMLA) has obligated practicing chartered accountants (CAs), company secretaries (CSs), and cost and management accountants (CMAs) carrying out financial transactions on behalf of their clients as 'Reporting Entity'

The notification defines a “relevant person” as someone authorized to conduct transactions on behalf of their clients.

‘Relevant Person’ includes – 

• Chartered Accountants, practicing individually or through a firm; 

• Company Secretary, practicing individually or through a firm; 

• Cost and Works Accountants, practicing individually or through a firm. ‘

Firm’ shall have the same meaning assigned to it in Section 2(23)(i) of the Income-tax Act, 1961. Individuals who have obtained certificate of practice under Section 6 of the Chartered Accountants Act, 1949 and practicing individually or through a firm

 Individuals who have obtained a certificate of practice under Section 6 of the Company Secretaries Act, 1980 and practicing individually or through a firm

 Individuals who have obtained a certificate of practice under Section 6 of the Cost and Works Accountants Act, 1959 and practicing individually or   through a firm

 

The Ministry of Finance (“MoF”) issued a notification vide no. S.O. 2036(E) dated May 3, 2023 that made changes to the relevant Sections of the PMLA. As a result, practicing Chartered Accountants (CA), Company Secretaries (CS), and Cost and Work Accountants (CWA), who carry out financial transactions on behalf of their clients, are now required to undergo the Know Your Client (KYC) process before commencing any work on behalf of their clients. They are now considered as “reporting entities” under PMLA and, inter alia, are obligated to report the specified financial transactions undertaken during the course of their professional activities carried out on behalf of their clients, to the Financial Intelligence Unit – India (FIU-IND). The intention behind these measures is to hold these professionals accountable for any dubious transactions conducted on behalf of their client.

Under PMLA “Reporting Entities” are required to verify client and beneficial owner identities, maintain transaction records, and implement enhanced due diligence for specific transactions.

 

The accountants will need to comply with verification of identity rules, maintain records and furnish information when asked.  They would need to examine the ownership and financial position, including clients' sources of funds, and record the purpose of the specified transaction. They will be liable under the PMLA if they facilitate a transaction that violates the law. In case a transaction undertaken by a client appears to be suspicious or possibly involves proceeds of crime, the reporting entity will need to step up the monitoring of the business relationship.

Earlier this year, the government had amended rules under the anti-money law, making it mandatory for banks and financial institutions to record financial transactions of politically exposed persons (PEP). The financial institutions or reporting agencies are now required to collect information about the financial transactions of non-profit organisations or NGOs under the provisions of the PMLA.

The ultimate effect of the recent notification is to ensure that such reporting entities shall maintain the record of all transactions and shall furnish the same to the director, FIU (Financial Intelligence Unit), who exercises the powers under Chapter IV of the Act. 

Section 2(1)(sa); post amendment

The Central Government by using the power specified under section 2(1) (sa) (f) notifies that the financial transactions carried out by a Practicing Chartered Accountant (CA), Company Secretary (CS) and Cost and Works Accountant (CWA) 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.

Within a week of issuing the first notification, MoF issued another Notification dated May 9, 2023 and further broadened the scope of the PMLA wherein Directors, nominee shareholders, formation agent of Companies/ LLPs are brought under the purview of PMLA.

As per the Notification dated May 9, 2023, the following activities when carried in the course of business on behalf of or for another person, as the case may be, shall be regarded as ‘activity’ for the purpose of Section 2(1)(sa)(vi) of PMLA: q acting as a formation agent of companies and limited liability partnerships; q acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and LLPs; q providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust; q acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and q acting as (or arranging for another person to act as) a nominee shareholder for another person. shall be regarded as ‘activity’ for the purpose of Section 2(1)(sa)(vi) of PMLA.

In the notification, it is also clarified that the following activities shall not be considered “activity” as per section 2(1)(sa)(vi): 

• Any activity that is carried out as part of any agreement of lease, sublease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to TDS under Section 194-I of the Income-tax Act, 1961; or 

• Any activity that is carried out by an employee on behalf of his employer during or in relation to his employment; or 

• Any activity that is carried out by an advocate, a CA, a CS or CWA in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under Section 7(1)(b) of the Companies Act, 2013.

• Any activity of a person which falls within the meaning of an intermediary as defined under Section 2(1)(n) of the PMLA.

Sec 54 of PMLA 2002 empowers RE’s sectoral regulator to assist FIU-Ind in its endeavors for AML/CFT.

The following officers are hereby empowered and required to assist the authorities in the enforcement of this Act, namely:

..

(hh)officers and members of the Institute of Chartered Accountants of India constituted under section 3 of the Chartered Accountants Act, 1949;

(hi)officers and members of the Institute of Cost and Works Accountants of India constituted under section 3 of the Cost and Works Accountants Act, 1959;

(hj)officers and members of the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980;];

..

Obligations on RE : CAs/CMAs/CSs

All practicing chartered accountants will be required to verify that the financial transactions carried out by them on behalf of clients are not related to money laundering or financing of terrorism.

The professionals will be required to examine the genuineness of the ownership and source of funds of clients. Accounting professionals must carry out know your customer (KYC) verification for their clients and maintain the records to furnish information to the authorities as and when asked for. Chartered accountants will need to exercise utmost care, adhere to professional standards and be vigilant in due diligence procedures.

The Relevant Persons shall comply with the following requirements: 

• As provided under section 11A, they are required to comply with the Aadhaar authentication, offline verification of the Aadhaar or Passport, or use any other officially valid document or modes of identification. 

• They must maintain the records of all transactions carried out by them on behalf of their client or beneficial owners and these are to be furnished to the director. 

• They must further maintain records of documents evidencing the identity of their clients and beneficial owners as well as their account files and business correspondence relating to the clients. 

• The records and documents need to be preserved for five years from the date of the transaction.

• The requirement of enhanced due diligence and maintaining such records will also apply to the CA, CS and CWAs.

They are obligated to establish and maintain policies and procedures to detect and report transactions related to WMD proliferation.

The Act mandates the reporting of suspicious transactions related to WMD proliferation to the FIU-India. It outlines the criteria for identifying transactions that may be linked to the financing of weapons of mass destruction.

It was further observed that chartered accountants will be equally responsible in terms of penalty and prosecution under the Prevention of Money Laundering Act, 2002 (PMLA.)  The responsibility of the client and CA will be equal if the PMLA provisions are invoked. CAs can now report certain transaction to regulators if they feel that there is a violation of PMLA provision

Suspicious Transaction Reports to be send

• Multiple cheques from different sources / bank accounts to the same account 
• Unrelated third-party payments 
• Overpayment followed by a refund request 
• Early foreclosure of a loans with no concern over fees and charges 
• Any customer for whom you cannot determine the true Ultimate beneficial owner 
• Payment from countries considered high risk for money laundering or terrorist financing 
• Frequent Changes in – Name of Company, Directors, Guarantors 
• WatchList & Adverse Media hits qLaw Enforcement Agency enquiries 
• Large and complex transactions and those with unusual patterns, inconsistent with the normal and expected activity of the customer, which have no apparent economic rationale or legitimate purpose
• Company (or Industry in which Company operates) facing significant downturn, which may 
• Result in payment delays, or Require restructuring, or Result in some potential losses

Penal Provisions

Professionals not holding a certificate of practice would not be hit by these provisions and thereby won’t face any additional compliance. However, these new provisions would deter all professionals from undertaking benami transactions on behalf of clients or helping them to undertake such transactions. Failure to comply with the obligations under the PMLA can lead to penalties, fines, or even prosecution. Ideally, professionals practising in assurance, advisory, and litigation divisions should not be impacted by these provisions,

In case these professionals fail to comply with the requirements of the above notification, there could be a monetary penalty imposed upon them which could be Rs. 10,000 to Rs. 1,00,000 for each failure.

To guide the professionals in Practice, FIU-India has implemented the AML & CFT Guidelines which are effective w.e.f. June 19, 2023 [copy placed at: AMLCFTguidelines04072023.pdf (fiuindia.gov.in)].

Happy Reading,

Those who read this, also read:

1. Virtual Digital Assets & Service Providers 

2.  Financial Intelligence Unit(FIU-Ind)

3. Reports to submitted to FIU-Ind by REs