1. INTRODUCTION

1.1. The Ministry of Finance has, in the recent past, published multiple notifications pertaining to the Prevention of Money Laundering Act, 2022 (“PMLA”). In quick succession, the Ministry of Finance released two notifications on May 03, 2023, and May 09, 2023, effectively broadening the scope and applicability of the PMLA. The first notification, published on May 03, 20231 (“Notification 1”), brings chartered accountants, company secretaries, and cost and works accountants (collectively “Professionals”), who perform certain financial transactions on behalf of their clients in the course of their profession, under the ambit of the PMLA.

1.2. Barely a week later, on May 09, 2023, the second notification2 (“Notification 2”) stated that individuals partaking in the following activities when carried out in the course of business on behalf of, or for other persons, were also under the purview of the PMLA:

  1. Acting as a formation agent of companies and limited liability partnerships (LLPs).
  2. Acting as (or arranging for another person to act as) a director/secretary/partner of a firm or similar capacity in relation to companies and LLPs.
  3. Providing a registered office, business address/accommodation, correspondence or administrative address for a company, LLP, or trust.
  4. 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.
  5. Acting as or arranging for another person to act as a nominee shareholder for another person.

1.3. Notifications 1 and 2 (collectively, the “Notifications”), ensure that the individuals performing the activities covered therein for or on behalf of another person/client are considered a ‘reporting entity' under the PMLA. As a result, persons covered under the Notifications are subject to the stringent compliance requirements under the PMLA, which inter alia, require enhanced client due diligence, transaction reporting, and maintenance of detailed records.

1.4. India is a member of the Financial Action Task Force (“FATF”), an inter-governmental body that develops and promotes policies relating to money laundering, terrorist financing, and the financing of weapons of mass destruction. As part of the FATF's objectives, member countries subject their anti-money laundering legislations to review by other member countries. Given that India's next mutual evaluation is tentatively scheduled for November of this year, efforts to comply with FATF Recommendations3 are par for the course. Specifically, Recommendation 22 encourages all member countries to bring lawyers, notaries, and other independent legal professionals and accountants preparing for or carrying out the activities mentioned in Notification 1 within the ambit of ‘reporting entities'. Recommendation 22 also discusses trusts and company service providers being treated as reporting entities. 

2. NOTIFICATION 1

2.1. Notification 1 modifies the definition of ‘person carrying on designated business or profession' to include the following activities carried out by Professionals on behalf of their clients:

  1. Transactions involving the sale and purchase of immovable property.
  2. Management of client money, securities, or other assets, bank, savings, or securities accounts.
  3. Organisation of contributions for the creation, operation, or management of companies
  4. Creation, operation, or management of companies, LLPs, or trusts.
  5. Sale and purchase of business entities.

2.2. Notification 1 does not apply to all activities carried out by Professionals. Its scope is limited to the financial transactions mentioned above that are carried out by the Professionals on behalf of their client(s). Mere professional services that do not involve financing or investment related transactions would not come under the purview of Notification 1.

2.3. The intent behind Notification 1 is to put the onus on the Professionals to ensure that they do not become a conduit for dubious financial transactions. There have been enough instances of Professionals who have unwittingly facilitated money-laundering and related activities. Given that, the reporting requirements under Notification 1 ensure that transactions related to placement, funneling, layering, and integration of proceeds of crime are easily detectable.

3. NOTIFICATION 2

3.1. Notification 2 broadens the scope of PMLA by including various activities like acting as a formation agent of companies or LLPs; acting as or arranging for another person to act as a director or secretary of a company or partner of LLP; providing a business or registered office address for a company or an LLP or a trust; acting as a trustee of an express trust or nominee shareholder for another person, as more particularly set out above. The purpose of Notification 2 appears to be related to cracking down on persons helping in the setting up of shell corporations which play a major role in money laundering and related activities.

3.2. Although Notification 2 significantly expands the scope of individuals carrying on ‘designated business or professions', it expressly excludes the following activities:

  1. Any act carried out under a lease, sub-lease, tenancy, or any other agreement or arrangement for the use of a building, land, or any other space. For the exclusion to apply, the consideration in such agreements must be subject to tax deducted at source for rental income.
  2. Any activity carried out by an employee on behalf of their employer during employment.
  3. Any activity carried out by an advocate, chartered accountant, cost accountant or company secretary, in practice, engaged in the formation of a company to the extent of filing a declaration of compliance with all norms under the Companies Act, 2013 and related rules for the incorporation of a company.
  4. Any activity carried out by a stockbroker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or – (a) other intermediary registered under Section 12 of the Securities and Exchange Board of India Act, 1992; or (b) an association recognised / registered under the Forward Contracts (Regulation) Act, 1952 or any member thereof; or (c) intermediary registered by the Pension Fund Regulatory and Development Authority; or (d) a recognised stock exchange under the Securities Contracts (Regulation) Act, 1956.

4. OVERVIEW OF OBLIGATIONS OF A REPORTING ENTITY

4.1. Professionals must now comply with the requirements under the PMLA for reporting entities.

4.2. The key reporting and due diligence obligations of a ‘reporting entity' are summarized below:

  1. Verification of the identity of its clients and the beneficial owner by implementing ‘KnowYour-Customer' (KYC) procedures to fulfil client due diligence requirements under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”).
  2. Maintenance of records4 relating to all transactions for a period of 5 (five) years from the date of a transaction with a client in accordance with the PMLA Rules. Further, Professionals would also have to store account files and business correspondence pertaining to its clients and documents evidencing the identity of its clients and beneficial owners for 5 (five) years after their business relationship has ended.
  3. Implementation of internal mechanisms to maintain and furnish the above information in accordance with the procedure and manner specified by its regulator5 from time to time.
  4. Appointment of a Designated Director and Principal Officer and subsequent communication thereof to the relevant authorities specifying the name, designation, and address of their Designated Director and Principal Officer.
  5. Submission of monthly reports to the Director by the tenth day of every succeeding month and furnishing of information, including suspicious transaction reports, to the Financial Intelligence Unit (FIU) as required under the PMLA and related rules.

5. INDUSLAW VIEW

5.1. The Notifications have brought significant changes to the PMLA landscape by making Professionals and other persons acting as proxies accountable as reporting entities. These Notifications have been brought to ensure that Professionals do not become a conduit for dubious financial transactions, inadvertently or otherwise. It is telling that activities involved in the setting up of shell corporations through the use of proxies have also been brought under the PMLA.

5.2. While the Notifications have imposed significant compliance requirements on the Professionals and individuals covered therein, they still however fall short of Recommendation 22 of the FATF. Specifically, Recommendation 22 appears to bring within its ambit even the mere preparation for the activities stipulated in the Notifications. Further, the absence of lawyers and other independent legal professionals may also be brought up again during India's mutual evaluation later this year. During the last round, India had submitted that the inclusion of lawyers as a designated profession under the PMLA would depend on resolving issues relating to reporting obligations and professional privilege.6

5.3. The Notifications certainly bring India's legal framework one step closer to being on par with international anti-money laundering standards. It is now imperative for the covered individuals to establish robust internal mechanisms and policies on how to approach the new compliance requirements. Guidelines with suitable examples on topics such as risk categorization for customer due diligence, identifying potentially suspicious transactions, signs of money-laundering activities etc. are of utmost importance for the detection of possible ‘red flags.'

5.4. In our view, there may be further guidance for the individuals covered by the Notifications on how to effectively comply with the PMLA requirements (as seen in the case of the Anti-Money Laundering and Combatting the Financing of Terrorism guidelines issued by the Central Board of Indirect Taxes and Customs with respect to real estate agents). While it is recommended that the individuals covered under the Notifications take steps to implement and ensure compliance with the PMLA, it is also important to keep an eye on further regulatory developments.

Footnotes

1.  Ministry of Finance, Department of Revenue, Notification S.O. 2036 (E) dated May 3, 2023.

2. Ministry of Finance, Department of Revenue, Notification S.O. 2135 (E) dated May 9, 2023.

3. The FATF Recommendations comprise 40 recommendations that each member country should ideally implement in order to effectively combat money laundering, terrorist financing, and financing of proliferation of weapons of mass destruction. 

4. As per the PMLA Rules, records of transactions must contain particulars relating to – (i) the nature of the transaction; (ii) the amount and currency in which it was denominated; (iii) the date on which it was conducted; and (iv) the parties to the transaction.

5. The ‘regulator' under Rule 2(fa) of the PMLA Rules with respect to Professionals is yet to be notified.

6. This is despite the Interpretive Note to Recommendation 23 specifically stating that suspicious transactions need not be reported by lawyers, notaries, other independent legal professionals and accountants if the relevant information was obtained in circumstances where they are subject to legal professional privilege.

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