A Brief overview of the Reporting Obligations cast upon Professionals under the Prevention of Money Laundering Act

Introduction

The inclusion of professionals under the Prevention of Money Laundering Act (PMLA) has been the topic of much discussion ever since the Notifications were made by the Ministry of Finance in the exercise of powers under Section 2(1)((sa)(vi) of the Act. Headlines on the 3rd May Notification screamed ‘Chartered Accountants, Company Secretaries and Cost Works Accountants covered under the PMLA’. The effects of the May 9th Notification are also pertinent for professionals, even though they may not be explicitly mentioned as reporting entities like in the 3rd May circular. As the roles, responsibilities, and ambit of professionals with regard to their client’s increase beyond the conventional roles, many professionals may find themselves triggering the reporting and maintenance of records obligations cast by the PMLA read along with the notifications.

It is pertinent to note that though the 3rd May notification applies only to practicing Chartered Accountants, Company Secretaries and Cost Work Accountants, the 9th May notification yields no such quarter. While the former does not include advocates within its ambit, the latter, being general in nature, does not make exceptions beyond those specifically provided for in the Explanation thereto. It would therefore, subject to the Explanation be applicable to everyone including Advocates.

The Notification of 3rd May 2023

The notification of 3rd May 2023 of the Ministry of Finance now includes certain financial transactions carried out by a professional (relevant person) on behalf of a client, in course of his or her profession to be an activity for the purposes of Section 2(1) (sa). These transactions are:

buying and selling of any immovable property;
managing of client money, securities or other assets; management of bank, savings or securities accounts;
organization of contributions for the creation, operation, or management of companies;
creation, operation, or management of companies, limited liability partnerships or trusts, and
buying and selling of business entities

Section 2(1) (sa) defines “person carrying on designated business or profession” as follows:

A person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with the casino;
Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government;]
Real estate agent, as may be notified by the Central Government;
Dealer in precious metals, precious stones, and other high-value goods, as may be notified by the Central Government;
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
Person carrying on such other activities as the Central Government may, by notification, so designate, from time to time;

It is interesting that the inclusion of these transactions carried out by the above-mentioned professionals on behalf of the clients into the PMLA framework is not a regulatory carte blanche. For the purposes of this notification, it is necessary that the exhaustive list of financial transactions as included in the notification should be carried out on behalf of a client by:

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;
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;
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

The Notification of 9th May 2023

The 3rd May notification was followed by another notification on May 9th. This Notification does not purport to be restricted to any designated professionals, nor are the professionals excluded. Chartered Accountants would therefore be covered under the ambit of this Notification also if they carry out the notified activities in the course of their business on behalf of or for another person.

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.

It can therefore be seen that being notified as a person carrying on designated business or profession puts the notified activities concerning chartered accountants, company secretaries, or cost and works accountants on a similar footing to entities like banking companies, financial institutions/intermediaries, casinos, real estate agents, dealers in precious metals, precious stones, etc. The common thread between these entities is that they are privy to commercial information regarding the persons to whom they provide services. The May 9 notification, though wider in its reach and ambit makes an exception for Advocates, Chartered Accountants, Cost Accountants and Company Secretaries to the limited extent in as much as the professional is involved in the formation of the 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). The said Clause reads as follows – “There shall be filed with the Registrar within whose jurisdiction the registered office of a Company is proposed to be situated, the following documents and information for registration, namely.a declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a Director, manager or secretary of the company, that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with”

Such persons carrying on designated business or profession are included within the ambit of definition of reporting entities as defined under Section 2(1) (wa)- “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.
It would therefore be prudent to also reproduce Section 2(1)(n) of the PMLA for easy reference:

(n) “intermediary”means,—
1. a stock-broker, [***] share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); or
2. an association recognised or registered under the Forward Contracts (Regulation) Act, 1952 (74 of 1952) or any member of such association; or
3. intermediary registered by the Pension Fund Regulatory and Development Authority; or
4. a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);]

Obligation of Reporting Entities

The obligation of reporting entity is primarily contained in Section 12 of the PMLA, which requires every reporting entity to: –

maintain a record of all transactions (five years from the date of the transaction between a client and the reporting entity), including information relating to transactions covered under clause (b), in such manner as to enable it to reconstruct individual transactions;
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;
maintain a record of documents (five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later) evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

Section 12A empowers the Director of the FIU-IND to access information by calling for records maintained under Chapter IV of the PMLA. This information needs to be furnished within the time and in the manner in which it is asked for. It is important to note that violations of Chapter IV of the PMLA can result in the imposition of a fine. After an enquiry, if the Director finds failure on behalf of reporting entity to comply with obligations under Chapter IV, he may issue a warning, direct compliance with specific instructions, direct that reports be sent at intervals as may be prescribed on the measures taken or 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. No criminality seems to automatically be associated for failure to comply with the obligations.

Section 11A of the PMLA places KYC obligations upon ‘every’ reporting entities while Section 12AA provides for enhanced due diligence by ‘every’ reporting entity prior to the commencement of each specified transaction.

The failure to report shall not ipso facto attract the provisions of Section 3 of the PMLA, which defines the offense of money laundering. The trigger for the offense of money laundering is contained within Section 3 itself and it clearly brings out the requirement of mens rea on the part of the offender. However, it shall trigger the provisions of Section 13 of the PMLA that provides for action to be taken against the reporting entity.

What are the Records required to be maintained by the Reporting Entity?

Rule 3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (herein after referred to as PMLA Rules), deals with the Maintenance of records with regard to nature and value of ‘all transactions’ by ‘every reporting’ entity. Be it noted that it does not mention ‘specified transactions’ but ‘all transactions’. These records therefore need to be scrupulously maintained by the professional with regard to the client once the definition of ‘designated profession or business’ is triggered and the professional becomes a reporting entity based on a transaction specified in the notification. These transactions, the records of which need to be maintained are as follows:

Every reporting entity shall maintain the record of all transactions including, the record of
1. 1. all cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency;
  2. all series of cash transactions integrally connected to each other which have been individually valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of ten lakh rupees or its equivalent in foreign currency;
(BA) all transactions involving receipts by non-profit organisations of value more than rupees ten lakh, or its equivalent in foreign currency;
1. all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions;
2. all suspicious transactions whether or not made in cash and by way of-
  1. deposits and credits, withdrawals into or from any accounts in whatsoever name they are referred to in any currency maintained by way of:
    1. cheques including third party cheques, pay orders, demand drafts, cashiers cheques or any other instrument of payment of money including electronic receipts or credits and electronic payments or debits, or
    2. travellers cheques, or
    3. transfer from one account within the same banking company, financial institution and intermediary, as the case may be, including from or to Nostro and Vostro accounts, or
    4. any other mode in whatsoever name it is referred to;
  2. credits or debits into or from any non-monetary accounts such as d-mat account, security account in any currency maintained by the banking company, financial institution and intermediary, as the case may be;
  3. money transfer or remittances in favour of own clients or non-clients from India or abroad and to third party beneficiaries in India or abroad including transactions on its own account in any currency by any of the following:-
    1. payment orders, or
    2. cashiers cheques, or
    3. demand drafts, or
    4. telegraphic or wire transfers or electronic remittances or transfers, or
    5. internet transfers, or
    6. Automated Clearing House remittances, or
    7. lock box driven transfers or remittances, or
    8. remittances for credit or loading to electronic cards, or
    9. any other mode of money transfer by whatsoever name it is called;
  4. loans and advances including credit or loan substitutes, investments and contingent liability by way of:
    1. subscription to debt instruments such as commercial paper, certificate of deposits, preferential shares, debentures, securitized participation, interbank participation or any other investments in securities or the like in whatever form and name it is referred to, or
    2. purchase and negotiation of bills, cheques and other instruments, or
    3. foreign exchange contracts, currency, interest rate and commodity and any other derivative instrument in whatsoever name it is called, or
    4. letters of credit, standby letters of credit, guarantees, comfort letters, solvency certificates and any other instrument for settlement and/or credit support;
  5. collection services in any currency by way of collection of bills, cheques, instruments or any other mode of collection in whatsoever name it is referred to.
3. all cross border wire transfers of the value of more than five lakh rupees or its equivalent in foreign currency where either the origin or destination of fund is in India;
4. all purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity, as the case may be.

It is interesting to note that though Rule 3 provides a list of transaction for which records need to be maintained, the Rule itself mentions that records must be maintained of all transactions. This would, ordinarily be alarming as the list provided seems to be largely indicative and inclusionary. Though an isolated reading of the Rule would make it seem like each and every transaction may need to be reported, the term transaction is defined in Rule 2(1)(h) and this definition would be relevant for the purposes of Rule 3. The as per Rule 2(1)(h), “transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes –

opening of an account;
deposits, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non- physical means;
the use of a safety deposit box or any other form of safe deposit;
entering into any fiduciary relationship;
any payment made or received in whole or in part of any contractual or other legal obligation;
any payment made in respect of playing games of chance for cash or kind including such activities associated with casino; and
establishing or creating a legal person or legal arrangement.

Suspicious Transactions are also separately defined : “Suspicious transaction” means a transaction referred to in clause (h), including an attempted transaction, whether or not made in cash, which to a person acting in good faith-

gives rise to a reasonable ground of suspicion that it may involve proceeds of an offence specified in the Schedule to the Act, regardless of the value involved; or
appears to be made in circumstances of unusual or unjustified complexity; or
appears to have no economic rationale or bona fide purpose; or
gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism;

Explanation. – Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist acts or by a terrorist, terrorist organisation or those who finance or are attempting to finance terrorism.

One may also reasonably conclude that the obligation to maintain record of such transactions would get triggered only if the reporting entity is privy to such a transaction or information. Readers may wish to peruse Rule 2 of the PMLA Rules (definitions) at length in order to clear any doubts.

What information needs to be recorded and how is it to be maintained?

Rule 4 of the PMLA rules states that the records referred to in Rule 3 should contain all necessary information specified by the Regulator to permit reconstruction of individual transaction including the following information:-

the nature of the transactions;
the amount of the transaction and the currency in which it was denominated;
the date on which the transaction was conducted; and
the parties to the transaction.

Again, the examples given are inclusive rather than exhaustive, the term used is ‘all necessary information’ specified by the regulator. The term regulator does not seem to refer to an authority under the PMLA but is defined by Rule 2(1) (fa) – “Regulator ” means a person or an authority or a Government which is vested with the power to license, authorise, register, regulate or supervise the activity of 3[reporting entities or the Director as may be notified by the Government for a specific reporting entity or a class of reporting entities or for a specific purpose;

a person or an authority or a Government which is vested with the power to license, authorise, register, regulate or supervise the activity of reporting entities or the Director as may be notified by the Government for a specific reporting entity or a class of reporting entities or for a specific purpose;
the Reserve Bank of India with respect to Central KYC Records Registry as defined in clause(ac) of sub-rule (1) of rule 2;
The Directorate General of Goods and Service Tax intelligence with respect to Gems and Jewellery Sector.

The information therefore needs to be maintained in a way specified by the regulator and the regulator would be different for different classes of reporting entities. The information needs to be such that it shall permit the reconstruction of individual transactions. Regulators for different bodies and different designated businesses/ professions may be different.

The procedure and manner of maintenance of the information recorded in Rule 4 is contained in Rule 5. The power to prescribe such procedure and manner is again granted to the regulator. Every reporting entity shall have to maintain information in respect of transactions with its client referred to in Rule 3 in accordance with the procedure and manner as may be specified by its regulator from time to time.

However, the rule also casts an obligation of every reporting entity to evolve an internal mechanism for maintaining such information in such form and manner and at such intervals as may be specified by its regulator from time to time and also puts a duty upon every reporting entity, its designated director, officers and employees to observe the procedure and the manner of maintaining information as specified by its regulator.

What is the Procedure and manner of furnishing information?

As the moniker ‘reporting entity’ suggests, Chapter IV of the PMLA does not merely mandate the maintenance of records but also mandates reporting of the information recorded as per the rules. To this end Rule 8 of the PMLA rules mandates that every reporting entity shall communicate to the Director the name, designation and address of the Designated Director and the Principal Officer. The furnishing of information shall be the responsibility of the Principal officer who is defined by Rules 2(1)(f) as “Principal Officer” means an officer designated by a reporting entity.

The Rules provide that the Principal Officer shall furnish the information referred to in clauses (A), (B), (BA), (C), (D), (E) and (F) of sub-rule (1) of Rule 3 to the Director on the basis of information available with the reporting entity. A copy of such information shall be retained by the Principal Officer for the purposes of official record.

There is also an onus put on every reporting entity to evolve an internal mechanism having regard to any guidelines issued by regulator, for detecting the transactions referred to in clauses (A),(B),(BA),(C),(D), (E) and (F) of sub-rule of Rule 3 and for furnishing information about such transactions in such form as may be directed by its Regulator.

Additionally, Rule 7(4) states that it shall be the duty of every reporting entity, its designated director, officers and employees to observe the procedure and the manner of furnishing information as specified by the Director in consultation with its Regulator.

Rule 2(1)(ba) defines “Designated Director” which means a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the Act and the Rules and includes -;

the Managing Director or a whole-time Director duly authorized by the Board of Directors if the reporting entity is a company,
the managing partner if the reporting entry is a partnership firm,
the proprietor if the reporting entity is a proprietorship concern,
the managing trustee if the reporting entity is a trust
a person or individual, as the case may be, who controls and manages the affairs of the reporting entity if the reporting entity is an unincorporated association or a body of individuals, and
such other person or class of persons as may be notified by the Government if the reporting entity does not fall in any of the categories above.

Rule 8 of the PMLA rules states that the Principal Officer of a reporting entity shall furnish the information in respect of transactions referred to in clauses (A), (B), (BA), (C) and (E) of sub-rule (1) of rule 3 every month to the Director by the 15th day of the succeeding month.

However, the information regarding ‘suspicious transactions’ has to be communicated promptly in writing or by fax or by electronic mail to the Director not later than seven working days on being satisfied that the transaction is suspicious. Similarly, the Principal Officer of a reporting entity shall furnish, the information in respect of transactions of purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity, as the case may be., every quarter to the Director by the 15th day of the month succeeding the quarter.

It is to be taken note that for the purpose of Rule 8, the delay of each day in not reporting a transaction or delay of each day in rectifying a mis-reported transaction beyond the time limit as specified in this rule shall constitute a separate violation. This may be a point of concern for reporting entities and should be duly noted.

What are the KYC and Maintenance of the records of the identity of clients requirements for reporting entities?

Section 11A, Section 12AA of the PMLA and Rule 9 of the PMLA rules provide for Enhanced Due diligence and client due diligence respectively. It is suggested that the readers acquaint themselves with the relevant Section and Rule respectively. The Explanation to Rule 10 states that – For the purpose of this rule, the expression “records of the identity of clients” shall include updated records of the identification data, account files and business correspondence.

Various organisations have sprung up providing KYC (know your customer) services. Though such services can be availed, it must be kept in mind that adherence to the statute and the Rule is the responsibility of the reporting entity and therefore the reporting entity must ensure that KYC is being done as provided for by the statute. An annexure on the Digital KYC process also finds place in the PMLA rules and should be carefully perused. That being said, every reporting entity has to maintain the physical copy of records of the identity of its clients obtained in accordance with Rule 9, after filing the electronic copy of such records with the Central KYC Records Registry. These records of the identity of clients shall be maintained by a reporting entity in the manner as may be specified by the Regulator from time to time. If the reporting entity does not have records of the identity of its existing clients, it has to obtain the records within the period specified by the regulator, failing which the reporting entity shall close the account of the clients after giving due notice to the client.

Furnishing of reports by defaulting Reporting Entities – Inquiry, Audit and Penalties.

Section 13 of the PMLA is the Section that is perhaps most important to Reporting entities. This Section provides for Inquiry, Audit and Penalties in order to ensure that the Reporting Entities make good upon their compliance obligations. Section 13 empowers the Director either suo moto or on an application made to make inquiry and take action against Reporting Entities with regard to their obligations under the Chapter IV of the PMLA. Section 13(2) (c) provides for the Director to seek reports from the Reporting Entity (through the Designated Director or any employee) with regard to measures that it is taking to make good the failure in compliance with provisions of Chapter IV of the Act. Rule 10A provides for the furnishing of a report on measures taken. The reporting entity or its Designated Director or any of the employees of the reporting entity have to furnish reports on the measures taken to the Director every month by the 10th day of the succeeding month. However, the Director may relax the time interval as mentioned above to every three months on specific request made by the reporting entity based on reasonable cause.

The inquiry can be either suo moto or on an application made by any authority, officer or person. It can be seen that the scope of the term ‘persons’ who can make such an application is extremely wide. The powers of inquiry given are quite substantial. The Director may make such inquiry as he sees fit 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. A specific provision exists for enabling to direct an audit of the records by an empaneled Chartered Accountant and that the expenses for such audit shall be borne by the Central Government.

The action to be taken against a defaulting Reporting Entity is to be recorded in an order and a copy of the order is to be furnished to every person who is a party to such proceedings. 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 he may—

issue a warning in writing; or
direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or
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
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.]

No prosecution is contemplated by Chapter IV of the PMLA for defaults in compliance. Infact, Section 14 of the PMLA contemplates that no civil or criminal proceeding shall lie against the Reporting Entities, its directors and employees for furnishing information.

Conclusion

I must confess that this purported conclusion cannot be strictly considered a conclusion. This may just be the start. We may expect more notifications and clarifications from the Ministry of Finance and the Regulators in the future with respect to Professionals and the services rendered by them. For a large number of professionals, these notifications shall still constitute ‘much ado about nothing’, but for those who will be covered within the ambit of these circulars, we expect a substantial burden of compliance and reporting. That said, compliance to the Reporting and Maintenance of Records as contemplated under the PMLA can be an interesting area of practice for professionals. I fully expect the ambit of those covered under the definitions of ‘Reporting Entities’ to increase in the future.

I’ve never turned to anybody for advice and counsel. Even when I was a very small child, I had to stand on my feet because of the circumstances of those times, and somehow, the circumstances have remained more or less the same. I have to take my own decisions.

Happiness is a state of mind, you know. I don’t think you are permanently happy. One is happy about certain things and not so happy about others.

— Indira Gandhi