The Notification and Circulars issued in July 2023 relevant to professionals under the PMLA

Aditya Ajgaonkar, Advocate

The notifications that are being issued by the Authorities under the Prevention of Money Laundering Act, 2002, (PMLA) are causing quite a flutter amongst the professional community. We have already had two notifications that have been covered in some detail by me in the AIFTP Journal (June 2023) where I commented upon the notifications dated 3rd May 2023 and 9th May 2023, issued in exercise of the powers granted to the Central Government under Section 2(1)(sa)(vi) of the PMLA to notify a “person carrying on a designated business or profession” as a reporting entity as defined by Section 2(1)(wa) of the PMLA. Various compliance requirements have been placed on reporting entities by the PMLA and such reporting requirements are a part of streamlining of the system in tune with the recommendations of the Financial Action Task Force (FATF) of which, India is a member. A circular/ communication (‘Circular’) dated 17th July 2023 has been issued by the Financial Intelligence Unit – India (Department of Revenue, Ministry of Finance of the Government of India) in addition to the above two notifications.

A new Notification has come out on 7th July 2023 that has been at times wrongly interpreted to purport to put Goods and Service Tax under the PMLA. This is not so. In this article, I propose to discuss both the new notification and circular issued by the Ministry of Finance.

What is the FATF?

The website of the FATF states that it is a global task force which leads global action to tackle money laundering, terrorism and proliferation financing. The FATF researches how money is laundered and terrorism is funded, promotes global standards to mitigate risks and assesses whether countries are taking effective action. The FATF Recommendations provide a comprehensive framework of measures to help countries tackle illicit financial flows. These include a robust framework of laws, regulations, and operational measures to ensure national authorities take effective action to detect and disrupt financial flows that fuel crime and terrorism and punish those responsible for illegal activity. Not only does the FATF set standards, but it also, with the help of a process called mutual evaluation, assess the implementation of the Recommendations.

The notifications of 7th May, and 9th May 2023 seem to have been gazetted to comply with the FATF Recommendations to ensure better compliance in order to better detect and therefore prevent the activity of money laundering. The Notification of 9th May 2023 however has a follow up circular dated 17th July 2023 which upon a prima facie perusal seems to aid in the implementation of the notification of 9th May 2023.

The Circular dated 17th July 2023

The circular of 17th July 2023 starts out by a reproduction of the 9th of May 2023 notification. Readers are requested to go through the article in the July issue of the AIFTP Digest for further details with regard to the Notifications. For the convenience of the readers, the contents of the said notification are being rediscussed in short.

If a person carries out the follow notified activities in the course of their business on behalf of or for another person, the person shall be covered by the definition of ‘designated business or profession’ –

• acting as a formation agent of companies and limited liability partnerships
• 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 limited liability partnerships;
• providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;
• 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
• acting as (or arranging for another person to act as) a nominee shareholder for another person.

These notified activities need to be read with the explanation contained in the same Notification.

Explanation.– For removal of doubts, it is clarified that the following activities shall not be regarded as activity for the purposes of sub- clause (vi) of clause (sa) of sub-section (1) of section 2 of the Act, namely:-

• 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);
• 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.

The follow up circular on July 17th Adds the following Paragraph:

The entities carrying out the activities mentioned in above para are referred as ‘Trust and Company Service Providers (TSPs)’. TCSPs are therefore covered within the definition of ‘Reporting Entity’ by virtue of the aforesaid Government of India’s notification dated May 9th 2023. As a result, TCSPs are required to strictly comply with the obligations under the PMLA and PML Rules that includes inter-alia registration on FINNET 2.0 portal with FIU-INDIA, appointment of Principal Officer and Designated Director, formulating risk management practices, performing customer due diligence, record keeping, training of employees and implementation of internal mechanisms to detect and report suspicious transactions to FIU-IND. Registration with FIU-INDIA is a pre-requisite for a reporting entity to become compliant with the reporting obligations under PMLA”

The paragraph reveals two interesting developments – firstly that the entities carrying out the activities are referred as ‘Trust and Company Service Providers’ – the circular mentions them both as TSP’s as well as TCSP’s. This term seems to be interchangeable or perhaps the mention of them as TSP’s seems to be a typographical error. At any rate, defining such reporting entities as TCSP’s/TSPs was not done in the 9th of May notification. It has been done now and it can safely be assumed that the said definition shall continue for future usage. We shall refer to them as TCSP’s for the purposes of this article

As per this circular, the TCSP’s are required to be registered on the FINNET 2.0 portal with FIU-IND (Financial Intelligence Unit -India) which is the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation, and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism. FIUIND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. As the 9th of May notification did not specify where the registration of the TCSP’s was to be done, the same has now been clarified by this new circular. It has also been clarified that the registration and subsequent compliance is compulsory for TCSPs to meet their respective obligations.

The discussion on the reporting obligations with the relevant reference to the provisions of the PMLA and the Rules thereunder Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’) have already been discussed in the Article in the June 2023 issue of the AIFTP Journal. This broadly covers how information needs to be recorded, how it is to be maintained, the procedure and manner of furnishing information, the KYC and maintenance of records with respect to identity of clients as well as the furnishing of reports by defaulting entities.

Penalties for Non – Compliance

Section 13 of the PMLA empowers the Director (of FIU-IND) to impose fines. In pursuance thereof, it also empowers the Director to (suo moto or on an application made by any authority, officer of person) to make inquiry or cause an inquiry to be made with regards to the obligations of the reporting entity. The section also empowers him to direct an audit of the reporting entity by an accountant from the panel constituted for this purpose by the Central government.

If failure to comply is found, the Director is empowered to issue a warning in writing, direct compliance as well as send reports with regards to compliance to the Director and also impose a monetary penalty that shall not be less than Rs. 10,000/- but may extend to Rs. 1,00,000/-.

It has to be mentioned that the penalty can be imposed for each failure. Therefore, the failure to register shall be one counted as one failure and the subsequent failure to comply with the reporting obligations shall each constitute a separate failure. Therefore, the monetary penalty may turn out to be quite substantial in the long run.

Conclusions regarding the Circular of 17th July 2023

The Circular as already discussed, is a natural extension of the 9th of May 2023 notification. The final paragraph of the Notification requests all Designated Directors and Principal officers of the concerned reporting entities (presumably TCSP’s in this case) to immediately register themselves with FIU-IND in the FINNET 2.0 portal set up for this purpose in order to comply with the reporting obligations under the PMLA. Needless to say, if the said registration and subsequent reporting is not done, then the consequences set out in Section 13 of the PMLA as discussed above shall follow. The reason why this clarification is done by a circular and not a notification is that a gazetted notification is required for the purposes of Section 2(1)(sa)(vi) of the PMLA to designated persons within the definition of a person carrying on designated business of profession. The new circular does not seek to make any new inclusions to the list and seeks to request the TCSP’s to comply with their obligation under the PMLA by registering on the portal.

Just to put doubts to rest – Though there is a penalty, there is no imprisonment or criminal proceedings for failure to report. It is important to note that the action will be taken by the Director of FIU-IND and not the Director of the Directorate of Enforcement (ED). The offense of money laundering is separate and failure to report does not ipso facto constitute the offense of money laundering. However, reporting of transactions, besides being statutorily mandated would be in the interest of professionals if they are sought to be roped in for an offense committed by one of their clients. Reading through Chapter IV of the PMLA and the PMLA rules is highly recommended for fellow professionals.

The Notification dated 7th July, 2023

On 7th July, 2023, the Ministry of Finance (Department of Revenue), came out with a Notification not under Section 2(1)(sa)(vi) of the PMLA but under Section 66(1)(ii) thereof. This notification seeks to make a further amendment to the 27th of June 2006 Notification (G.S.R. 381(E)) which allows for sharing of information by the FIU-IND with authorities or bodies that are specified by the said notification for the purpose of performing their duty. The first body / authority notified under the 27th of June 2006 was the Directorate of Enforcement. Other bodies were the Cabinet Secretariat (Research & Analysis Wing), the Ministry of Home Affairs or National Security Council Secretariat or the Intelligence Bureau, the Reserve bank of India, The Economic offenses Wing of the Central Bureau of Investigation, the Chief Secretaries of the state Governments, the Department of Company Affairs, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India.

Section 66 of the PMLA

Section 66 of the PMLA provides for the Disclosure of information and reads as follows:

(1) The Director or any other authority specified by him by a general or special order in this behalf may furnish or cause to be furnished to—

(i) any officer, authority or body performing any functions under any law relating to imposition of any tax, duty or cess or to dealings in foreign exchange, or prevention of illicit traffic in the narcotic drugs and psychotropic substances under the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985); or

(ii) such other officer, authority or body performing functions under any other law as the Central Government may, if in its opinion it is necessary so to do in the public interest, specify, by notification in the Official Gazette, in this behalf, any information received or obtained by such Director or any other authority, specified by him in the performance of their functions under this Act, as may, in the opinion of the Director or the other authority, so specified by him, be necessary for the purpose of the officer, authority or body specified in clause (i) or clause (ii) to perform his or its functions under that law.

[(2) If the Director or other authority specified under sub-section (1) is of the opinion, on the basis of information or material in his possession, that the provisions of any other law for the time being in force are contravened, then the Director or such other authority shall share the information with the concerned agency for necessary action.]

It is therefore clear that the Section 66(1)(ii) provides for sharing of information that is received by the FIU-IND to various authorities which are not expressly provided by Section 66(1)(i) by notification. The 27th June 2006 Gazetted Notification added certain other officers, authorities or body performing functions under the law. This list has been amended from time to time by other Gazetted Notifications in include more officers, authorities or body performing functions under the law with which the FIU-IND can share the information that is received by it. The GST network joins other authorities like the State Police Departments, Military Intelligence, Central Vigilance Commission, the Competition Commission of India etc. in the list. The notification of 7th July 2023 allows the Director of FIU IND to share information received by it with the GST network.

The Implications of the Notification dated 7th July 2023

It would be by now clear that the said notification does not include GST in the list of scheduled offenses and therefore does not enlarge upon the ambit of the offense of money laundering. Offenses under the GST are not scheduled offenses under the PMLA and therefore do not attract the rigours of Section 3 of the PMLA. This notification however means that the information received by the Director of FIU IND shall be shared with the GST Network. This will aid intelligence sharing and opens up a large database for the GST authority to better detect evasion of GST etc. It shall also enhance the effectiveness of the GST network and provide them with voluminous data for the purposes of adjudication of GST as well as to find out escapement of GST. After all, as the “Financial Intelligence Unit – India (FIUIND) is the central, national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs”.

Section 66 provides for the outflow of information received by the FIU-IND. Considering that the FIU-IND receives information from the reporting entities and the ambit of reporting entities is expanding (one may look at the 3rd May 2023 and 9th May 2023 notifications and also the 7th March 2023 notification regarding virtual digital assets). To conclude, the notification dated 7th July 2023 is rather to the advantage of the GST authorities than to the authorities under the PMLA.