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CA, CS handling client money in PMLA ambit; FinMin notifies rules

New Delhi, May 4, 2023

Aim is to curb fraudulent practices

To further tighten its control of practising accountants, the Centre has brought within the ambit of the Prevention of Money Laundering Act (PMLA) their “financial transactions” such as operating and managing their client firms and trusts, and buying and selling business entities.

The Union finance ministry issued a gazette notification on this on Wednesday.

Under the new rule, chartered accountants, company secretaries, and cost and works accountants carrying out such transactions (on behalf of their clients) will now be required to go through the Know Your Company (KYC) process before commencing work.

This implies accountants are now reporting entities if they are managing their clients’ money.

Under the PMLA, every reporting entity is required to maintain a record of all transactions and furnish them to financial intelligence units (FIUs). The move aims at curbing fraudulent practices by which accountants allegedly help their clients to launder money.

The notification further mandates that accountants will have to take steps to examine the ownership and financial position of their clients, including their sources of funds, and record the purpose behind conducting the transaction.

Specifying the financial transactions, the notification said activities such as buying and selling any immovable property; operating and managing companies, limited liability partnerships or trusts; and buying and selling business entities would come under the PMLA.

Even managing client money, securities or other assets; bank, savings or securities accounts; organising contributions for creating, operating or managing companies will come under the scope of the PMLA, it said.

The Act also stipulates that in case a transaction by a client appears to be suspicious or involves the proceeds of a crime, the reporting entity will step up monitoring future business relations.

“Due to a few unfortunate incidents, services such as setting up companies by chartered accountants, company secretaries, and cost and works accountants have come under PMLA. The Act is stringent and compliance is very onerous,” said Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm.

Widening scope

  1. Activities now recognised under PMLA:
  2. Buying and selling of any immovable property, business entity
  3. Operating or managing clients’ companies, LLP/trusts
  4. Managing client money, securities or other assets; bank or securities accounts
  5. CA/CS to act as reporting entities; to conduct KYC of clients in case of such transactions
  6. Move to curb fraudulent practices for laundering money

He added these professionals were already regulated by bodies set up under various Acts of Parliament and such measures were uncalled for. The notification said: “Failure to meet the foregoing requirements by reporting entities entails imposition of penalty by the FIU, under Section 13 of the Act.”

Section 14 prohibits any other proceeding, civil or criminal, against a reporting entity other than the penalty provided under Section 13.

However, it will always be open to the Enforcement Directorate (acting agency) to arraign the reporting entity as an accused for knowingly assisting the main accused in money laundering.

Notably in the past few months, the government has tightened the anti-money laundering rules by widening its scope by adding more reporting entities including crypto exchanges. It has also lowered the threshold to 10 per cent from 25 per cent for identifying ultimate beneficial ownership of foreign portfolio investors.

The efforts are being taken ahead of the assessment of India under the Financial Action Task Force (FATF), which is expected to start by November this year.

The FATF is a global regulator for global money laundering and terror financing. It assesses country compliance on tackling such activities.

[The Business Standard]

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