Why CAs, company secretaries, and cost accountants are now under the Prevention of Money Laundering Act
Context- Over the last few months, the government has been undertaking changes in the money laundering law, the Prevention of Money-Laundering Act (PMLA), with the latest tweak bringing in practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into its ambit and allowing 22 financial entities — including Amazon Pay (India) Pvt. Ltd, Aditya Birla Housing Finance Ltd and IIFL Finance Ltd — to verify the identity of their customers via Aadhaar.
What are the changes being done under the PMLA?
- In March, the Finance Ministry amended the money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries.
- In addition, it also defined “politically exposed persons” (PEPs) under PMLA as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.
- The amendment was in relation to foreign PEPs and not domestic ones.
- On May 3, the Finance Ministry brought in practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into the ambit of the money laundering law.
- On May 4, the Finance Ministry widened the list of non-banking reporting entities to allow 22 financial entities to verify the identity of their customers via Aadhaar Aadhaar under the ambit of the money laundering law.
- Last month, the Ministry of Electronics and IT (MeitY) had proposed allowing a wide range of private entities to carry out Aadhaar authentication for a number of services, expanding the use of the digital identity beyond its ministries and departments.
Why have these changes in PMLA been undertaken?
- The amendments are part of a series of changes being undertaken in the money laundering law to plug loopholes ahead of India’s proposed assessment later this year under the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.
- Like in the case of the definition of PEPs, the tweak was done to define politically exposed persons under PMLA to bring uniformity with a 2008 circular of the Reserve Bank of India (RBI) for KYC norms/anti-money laundering standards for banks and financial institutions, which had defined PEPs in line with FATF norms.
- Now, in the case of CAs, company secretaries and accountants, lawyers and legal professionals seem to have been kept out in the new definition of entities covered under the PMLA.
- While professionals pointed out the exclusion, officials said the changes have been made applicable only for transactions where they undertake financial transactions on behalf of their clients while regular functions like certification of accounts, and financial advice among others for a fee are not covered under this change in PMLA.
- “Lawyers do financial transactions on behalf of their clients for selling and buying real estate etc., they may advise for formation of a company or Mergers & Acqusitions. But lawyers can’t take money for these activities. The Advocates Act bars them to act as an agent. Even CAs don’t do these either but there is no bar in their law. Practicing accountants as part of a firm are giving these services. This notification is very restrictive,” the official added.
- The changes in PMLA law assume significance ahead of the proposed assessment of India under the FATF later this year. India’s possible onsite assessment is slated for November, while the assessment is likely to come up for discussion in the plenary discussion in June next year.
- Before this, the FATF had undertaken an evaluation for India in June 2010.
What is the response of financial professionals to these changes?
- The amendments are expected to aid investigative agencies further in their probe against dubious transactions involving shell companies and money laundering, experts said. Many CAs took to social media to comment against the changes stating that auditors and legal professionals have been left out.
- The changes have given rise to concerns amongst financial professionals that they could possibly not just face a penalty for non-compliance but could also have potential run-ins with investigative agencies.
- The reporting entities shall be expected to maintain the record of all transactions and would be required to furnish these to the Director (Financial Intelligence Unit).
- The reporting entities would also be expected to conduct KYC before the commencement of each specified transaction and will have to examine the ownership and financial position including sources of funds of the client.
- Failure to meet these requirements could invite imposition of penalty by the Director, FIU and even more action by other investigative agencies such as the Enforcement Directorate.
Conclusion- The changes in PMLA law assume significance ahead of the proposed assessment of India under the FATF later this year. The FATF is the global money laundering and terrorist financing watchdog. The FATF has 40 recommendations related to anti-money laundering/counter-terrorist financing (AML/CFT) which the member countries have to comply with.
Syllabus- GS-3; Economy
Source- Indian Express