Role & Liabilities of Chartered Accountants under Prevention of Money-Laundering Act- Kolkata Syndrome – Financial Action Task Force (FATF) Recommendations
Background
The promulgation of the Prevention of Money-Laundering Act, 2002 w.e.f.01-07-2005 is the result of the recommendations of the FATF issued from time to time. The recent notifications of May 2023 too are in line with the recommendations of the FATF to meet the requirements of review of India’s counter-terrorism financing (CFT) and anti-money laundering (AML) measures which is set to begin with an on-site review of India’s actions scheduled for November 2023. India’s activities are set to be discussed at the FATF Plenary meeting in June 2024. India last came under investigation by FATF in June 2010. According to the FATF, it has twice postponed its review of India’s AML-CFT regime since 2019.
Prevention of Money-Laundering Act, 2002 came into force w.e.f. 1-7-2005 vide Notification No. GSR 436 (E), dated 1-7-2005 and having learnt the finer points surfaced during the implementation of the Act, the Central Government felt the necessity of introducing the concept of Reporting Entity in the Act to effectively prevent and control money laundering. Reporting Entity, thus, was introduced vide Prevention of Money-laundering (Amendment) Act, 2012, w.e.f. 15-2-2013.
Sec 2(1)(wa) “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession. “Person carrying on designated business or profession” has been defined under clause 2(1)((sa) to include Activities notified by the Central Government u/s 2(1)(sa)(vi). (Vide Notification dated 3-5-2023 (Issued u/s 2(1)(sa)(vi)). These activities are those activities which are conducted or performed by chartered accountants, company secretary and cost accountant (Professionals) who hold certificate of practice from their professional bodies. Such activities are
Financial transactions carried out by a Relevant Person on behalf of his client, in the course of his or her profession, in relation to the following activities-
a) buying and selling of any immovable property;
b) managing of client money, securities or other assets;
c) management of bank, savings or securities accounts;
d) organisation of contributions for the creation, operation or management of companies;
e) creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.
Services by professional How Far Covered: Section 2(1)(sa)(vi)
The types of services generally provided by a Chartered Accountant are varied.
The more important ones amongst them are:-
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Accountancy |
Auditing | Taxation | Cost Accountancy | Special Company Work |
| Investigation & Forensic audit | Executors and Trustees | Directorship of companies | Companies Secretarial Work | Management Accounting |
| Share Valuation Work | Management Consultancy | Management information system, | Budgetary control system | Best use of fixed & floating capital |
| Operational control | Effective utilisation of scare resources | Amalgamations, reconstructions, takeovers and expansion schemes | Feasibility study for expansion and diversification | Digital accounting services |
| Appraisal of personnel policies and practices. | Acting as advisor or consultant to an issue, | Acting as investment counselor | Acting as registrar to an issue of shares/other securities | Arbitrator for the settling of disputes |
| Duties of a trustee or as an Insolvent Professional in bankruptcy under Bankruptcy Code or under a deed of arrangement
(Source: https://www.icai.org) |
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Other more specific and specialized services ( now covered by the notifications) which chartered accountants offer to their clients in the course of their profession are services relating to:
Financial transactions in relation to the following activities-
|
a) Buying and selling of any immovable property; |
b) Managing of client money, securities or other assets; |
| c) Management of bank, savings or securities accounts of the clients; | d) Organisation of contributions for the creation, operation or management of companies; |
| e) Creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities, | |
Specific Discussion on services (now covered under PMLA) rendered specifically by professional CAs.
Financial transactions carried out by a Relevant Person on behalf of his client, in the course of his or her profession, in relation to the following activities- (S.O. 2036(E).— the 3rd May, 2023) namely
i. Buying and selling of any immovable property;
ii. Managing of client money, securities or other assets;
iii. Management of bank, savings or securities accounts;
iv. Organisation of contributions for the creation, operation or management of companies;
v. Creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities,
shall be an activity for the purposes of said sub-section. Section 2(1)(vi)(sa)
Relevant Person includes
a) Chartered Accountant holding a certificate of practice
b) Company Secretaries holding a certificate of practice
c) Cost and Works Accountant holding a certificate of practice
An analysis of the above provision leads us to infer that every service under the sky rendered by a chartered account is not covered under the provisions of the Act. The services rendered by the chartered accountant can’t be counted on fingertips, still out of the 31 sample services described above rendered by a chartered accountant only 5 services relating to financial transactions have been covered under the definition of the Reporting Entity as defined in the Act vide notification dated 3-5-2023.
The coverage of even those 5 services is not absolute but conditional upon many circumstances: The prerequisite for including the services in the definition of Reporting Entity are as under:
1) The transaction being the notified activity should be a Financial Transaction.
2) The Financial Transaction must have been done by a Relevant person
3) The Financial transaction must have been made on behalf of his
4) The Financial transaction must be in the course of his or her profession, in relation to the following activities-
a) buying and selling of any immovable property;
b) managing of client money, securities or other assets;
c) management of bank, savings or securities accounts;
d) organisation of contributions for the creation, operation or management of companies;
e) creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities,
The services would be so included only if the following conditions are satisfied:
1) The service must be related to a financial transaction. A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A financial transaction always involves one or more financial asset, most commonly money or another valuable item such as gold or silver.
There are many types of financial transactions. The most common type, sales, purchases, receipts, payment etc. Loans and mortgages are examples of credit transaction.
2) The service must have been rendered by a Relevant Person. The definition of relevant person is inclusive and not exhaustive. So far only 3 types of persons have been included within it:
Relevant Person includes
a) Chartered Accountant holding a certificate of practice
b) Company Secretaries holding a certificate of practice
c) Cost and Works Accountant holding a certificate of practice
In future many more persons, professionals or otherwise, carrying on the said activities may be included in the definition and made liable as a reporting entity.
3) The Financial transaction must have been made on behalf of his client, which means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting. (Sec 2(1)(ha). If the Principal-Cliental relationship does not exists at the time of commencement of the financial transaction, such transaction would be out of the scope of the amendment.
4) The Financial transaction must be in the course of his or her profession, in relation to the notified activities. Needless to say, if any person, being a chartered accountant, does not hold Certificate of Practice or is not engaged in the conduct of the profession of a professional, then he would not be covered by the amendment. This means if a professional is in employment of an employer, then he may not be included.
5) The exceptions have been carved specifically of practicing professionals but they may still be covered within the Act by virtue of their being in other capacity under some other notified services.
6) The amendment may not ipso facto, make the above services of professionals as being equal to money laundering or that every professionals must resist engaging in the above activities for the fear of being caught under the Act for some reasons. What is needed now is that the practising professional must be extra vigilant and careful while engaging in these types of financial transactions or services.
7) Every financial transaction or service may not mean that he would be necessarily be held guilty of the Offence of money-laundering. The offence of money laundering would be constituted only if he “directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property”
8) For constituting the offence of money laundering the presence of mens rea is necessary which means knowingly to be a party or is actually involved with knowledge, in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property. If the professional can prove that he was absolutely unaware of or had no knowledge that the client with whom he was dealing is actually a money launderer.
9) Burden of proof : But sadly enough, the Burden of proof is on to the professional to prove that he is not guilty. Section 24 provides that
“in any proceeding relating to proceeds of crime under this Act,-
(a) in the case of a person charged with the offence of money-laundering under section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-laundering; and
(b) in the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.
10) Safeguard KYC: Section 11
While dealing with the notified activities the professional must make a full KYC of the client and take full care to do a verification of identity of the client and the beneficial owner by- authentication under the Aadhaar, by offline verification under the Aadhaar, by use of passport issued or use of any other officially valid document or modes of identification as may be notified by the Central Government in this behalf.
11) Maintenance of Records: Section 12. Not only should the professional make a verification of the identity of the client/beneficial owner but shall also-
(a) maintain a record of all transactions, including information relating to transactions covered under clause (b), in such manner as to enable it to reconstruct individual transactions;
(b) 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;
(c) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.
(d) These records shall be maintained for a period of five years from the date of transaction between a client and the reporting entity or after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later..
12) Enhanced due diligence- Section 12AA
Every reporting entity shall, prior to the commencement of each specified transaction,-
(a) verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar:
(b) take additional steps to examine the ownership and financial position, including sources of funds of the client, in such manner as may be prescribed;
(c) take additional steps as may be prescribed to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties.
(d) Where the client fails to fulfil the conditions laid down the reporting entity shall not allow the specified transaction to be carried out.
(e) Where any specified transaction or series of specified transactions undertaken by a client is considered suspicious or likely to involve proceeds of crime, he shall increase the future monitoring of the business relationship with the client, including greater scrutiny or transactions in such manner as may be prescribed.
(f) The information obtained while applying the enhanced due diligence measures shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.
For the purposes of this section, “specified transaction” means-
(a) any withdrawal or deposit in cash, exceeding such amount;
(b) any transaction in foreign exchange, exceeding such amount;
(c) any transaction in any high value imports or remittances;
(d) such other transaction or class of transactions, in the interest of revenue or where there is a high risk or money-laundering or terrorist financing, as may be prescribed.
Given the nature & the type of specified transactions, it is not likely that any professional would engage in such types of specified transactions which require transactions-in-money requiring licence from the RBI, unless the government notify such other transaction or class of transactions, where there is a high risk or money-laundering or terrorist financing, as may be prescribed
13) Punishment for money-laundering.
Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven/ten years and shall also be liable to fine.
14) The question that arises now is as to why the activities of only these 3 types of professionals have been notified and why other professionals have been left out. The reason is not far to seek. It may be due to what is called “Kolkata Syndrome”
15) Professionals (Chartered Accountant)- PMLA & Kolkata Syndrome.
If one takes a look at the types of activities notified for a professional namely,
a) buying and selling of any immovable property; b) managing of client money, securities or other assets; c) management of bank, savings or securities accounts; d) organisation of contributions for the creation, operation or management of companies; e) creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities,
he will come to the conclusion that these activities provide very fertile ground for the purpose of money laundering as these have a very wide scope for hiding high value transactions or parking the funds laundered. These transactions were very much in vogue until recently when the ED decided to go after them. One way to control such type of laundering was to make the adviser i.e. the professional, for such transactions, responsible as a reporting entity and mandating him to do a proper verification and KYC of his clients before the transaction takes place and also maintain full records of the same and submit the information to the Authority under the Act from time to time and failing which to punish him with fine and imprisonment.
It is pertinent to mention here that these types of transactions have genesis of money laundering through the vehicle of a shell company, a company that exists in name only and is used as a vehicle for deft financial maneuvers or one that is kept dormant and activated for future use in some other capacity. Such a company exists only on paper and has no office or employees. But, and this is a big but, the company may hold a bank account or passive investments, or can be the registered owner of assets such as intellectual property, or even ships.
The shell company culture began in Kolkata from the 1980s and has since flourished. Crores of money moved through byzantine channels and changed hands a dizzying number of times before it is considered laundered — black from white, essentially. All shell companies follow rules of company fund transfers, and even hold Annual General Meetings.
Kolkata was considered a shell company haven because the commission in Kolkata for depositing money in such shell companies was just 2 percent. It was 10 percent in Bengaluru and 8 percent in Delhi. That’s why Kolkata was preferred.
Offences committed by shell companies were primarily tax evasion and money laundering which was primarily a case of cheating/fraud. This was very minimal and not serious enough to attract serious punishment. Taking advantage of this, shell companies had become a conduit for money laundering.
Kolkata turned out to be India’s own tax haven, thanks to the presence of a large number of shell companies. The government of India then initiated measures to put a curb on “paper companies”, to unearth undisclosed money.
Almost 90% of shell companies were in Kolkata. The reason why Kolkata is the preferred choice of venue is said to be easy availability of professionals in this type of activity, with an established network.
In Kolkata, it is said, there was a community of chartered accountants, and it is easy to find ‘directors’, who for Rs 5,000 will sign anywhere. There were brokers and entry operators; they run many companies from a single premise and a laptop.
According to sources, the department had identified at least 150,000 shell companies in this city, with nearly 6,000 professionals allegedly involved.
According to informal estimates, about 75 per cent of the professionals involved in opening shell companies in Kolkata are not even professional professionals. Setting one up does not even require professionals. A person with a basic knowledge of finance can undertake such transactions. A professional only certifies the books, not the company.
This apart, the cost of hiring a professional is three to four times lower in Kolkata than in Mumbai.
Examples are there. The then West Bengal education minister and his son-in-law were involved in running shell companies through which money generated from the jobs-for-cash racket was routed by the accused minister to buy property in Kolkata and other districts in West Bengal.
The links of the family members of the accused minister with bogus companies, wherein no business was being conducted, had been found on scrutiny of the balance sheets and recording statements of the directors of the companies. These companies were incorporated on the direction of accused minister for the sole purpose of managing the funds to hide original source of income and purchasing immovable properties in the name of the companies.
The accused minister stated that he was not a director, proprietor, partner and did not hold any other position in any entity apart from one company, which never functioned. They were made accused under Sections 3, 4 and 70 of PMLA. Section 3 of PMLA refers to individuals involved in money laundering while Section 70 is related to the same crime committed by a company or employees representing it. Section 4 says the quantum of punishment for money laundering is no less than three years of rigorous imprisonment which may be extended up to seven (ten) years. The guilty is also liable to fine.
The entire amount of bribe-for-job was used to buy land, construction material and pay workers for building the schools. One of the shell company was formed at the instructions of the accused minister, who utilized the services of the two intermediaries to install dummy directors in the company with the intention of concealing his illegal funds derived out of criminal activities which were used for purchasing posh and expensive immovable properties. Numerous shell companies were used to launder bribes paid by ineligible candidates to get non-teaching and teaching jobs in state-run schools. The unemployed and poor people were made directors of the shell companies against salaries ranging between ₹5,000 and ₹15,000.
One more example of money laundering via shell company is of a minister of the Government of Delhi who is languishing in jail for nearly a year without bail for money laundering via Kolkata route.
16) Prequel to the Notifications- Recommendations of the Financial Action Task Force (FATF)
a) Financial Action Task Force (FATF) is an inter-governmental body, responsible for setting global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT). India became Observer at FATF in the year 2006. Since then, India has been working towards full-fledged Membership of FATF.
b) As a part of its Membership, a joint FATF / Asia Pacific Group Mutual Evaluation Team visited India in November-December, 2009 for on-site assessment of India’s compliance with the 40+9 Recommendations of FATF. Mutual FATF Plenary adopted the Mutual Evaluation Report on India on 24th June 2010 and on 25th June 2010 admitted India as 34th Country Member of FATF.
c) FATF membership is very important for India in its quest to become a major player in the International finance. It helps India to build the capacity to fight terrorism and trace terrorist money and to successfully investigate and prosecute money laundering and terrorist financing offences. India will benefit in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups.
d) FATF recommendation 10 March 2023 – In March 2022, the FATF agreed on tougher global beneficial ownership standards in its Recommendation 24 by requiring countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies.
e) The revisions to the Standard will help prevent the organised criminal gangs, the corrupt and sanctions evaders from using anonymous shell companies and other businesses to hide their dirty money and illicit activities.
f) The guidance will help countries identify, design and implement appropriate measures in line with the revised Recommendation 24 to ensure that beneficial ownership information is held by a public authority or body functioning as a beneficial ownership registry, or an alternative mechanism that enables efficient access to the information.
g) The guidance will also help countries assess and mitigate the money laundering and terrorist financing risks associated with foreign companies to which their countries are exposed.
h) The guidance explains types and sources of relevant information, and mechanism and sources to obtain such information. This includes the multi-pronged approach, which consists of combining information from, among others, companies themselves, public authorities in a registry, or alternative mechanism if it ensures rapid and efficient access to beneficial ownership information.
i) This guidance is the result of several months of intense consultations with external stakeholders and the private sector. It aims to assist policy makers and practitioners in national authorities and private sector stakeholders in implementing the necessary measures so that shell companies can no longer be a safe haven for illicit proceeds with links to crime or terrorism.
This article be read with in conjunction with my 2 earlier 2 articles on the same subject published on this website @taxguru.in
Disclaimer: Views expressed are strictly personal and meant for only academic purposes and not for any professional purpose for which expert opinion may be obtained by the readers. The information given in this article has been clued from the open sources in the public domain. By citing the examples of a handful number of chartered accountants who indulged in such nefarious practices, I do not wish to demean this esteem profession and its learned members in general. The author is also a member of the ICAI with 38 years of standing in the profession. The citation of the examples was necessary in the context of the contents of the article.
(Republished with amendments)
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