The recent notification under the Prevention of Money Laundering Act, 2002 (PMLA) has obligated practising chartered accountants (CAs), company secretaries (CSs), and cost and management accountants (CMAs) carrying out financial transactions on behalf of their clients as ‘Reporting Entity’. This has created concerns amongst these professionals not on the compliance part - which is to report suspicious transactions in a prescribed format - but on their ability to identify, track and record these transactions. Questions have also been raised on the exclusion of legal professionals from the ambit of reporting entities.
The apprehensions are not misplaced. The intent behind the notification, however, is to make all links in money laundering more responsible and accountable in preventing transactions involving illegitimate money including conversion thereof into legitimate money. The notification should further be seen in the context of recent cases of reported involvement of professionals in the incorporation of companies with Chinese links and also in money laundering cases in the recent past.
Requirement to Report
It is to be understood that these professionals are already required in one form or another - under PMLA, other applicable relevant laws or applicable codes of professional conduct - to be cautious of dubious financial transactions, and appropriately report them whenever they have a suspicion. The documentation requirements go beyond just getting the fundamental KYC done.
The PMLA is very wide in its scope and covers all persons who are directly or knowingly a party to money laundering and that makes them liable to monetary penalties, cancellation of practising license and imprisonment, apart from the loss of reputation. The Act provides for rigorous interrogation and empowers the designated officers to summon any person, considered necessary, to produce any records or to hand over evidence.
Auditors are anyway required to suitably report fraudulent transactions in their report and to the government. The Companies Auditors Report Order, (CARO), 2020 impose an obligation to report amongst others on details of investments, advances or loans given, compliance on loans to directors, deposits accepted, unrecorded income, funds raised and utilisation, and frauds and whistle-blower complaints. Assurance standards and guidance issued by the Institute of Chartered Accountants of India (ICAI) and its ethical standards applicable to practising CAs outline their responsibility towards detection and reporting of frauds and suspicious transactions.
Importance of Due Diligence
Under the PMLA, notified professionals may find it difficult to take the plea that their role is not to detect suspicious transactions while carrying out assignments for and on behalf of the clients. Legal professionals, though not explicitly included in the notification, are nonetheless required to comply with the provisions of the PMLA in case they act as intermediaries by providing assistance to their clients in the buying or selling of goods or services, or by providing services related to the investment, lending, or managing of money or assets. Under the Anti-Money Laundering Regulations of the UK and some other countries, legal professionals are considered as relevant persons like finance or compliance professionals.
Practising professionals as a general rule should now have requisite capabilities and deploy tools and techniques which are sufficiently robust, dynamic and aligned to the risk profile of the client. It is critical for them to fully understand the background of promoters and management, internal control mechanisms, and the culture of the organisation before accepting an assignment. After acceptance, in case the professionals refuse to continue, they might still be required to state the reasons with details for the same should there be an investigation.
While carrying out the assignment, they should identify changes in patterns, unusual transactions and other red flags, and deploy tools and techniques to form a considered view to report or not. These should be compatible with the complex nature of present-day businesses and the fact that these transactions are ingeniously structured, at times without a proper document trail, through multiple layers of entities. The existence of some of these entities outside the country and in jurisdictions with different sets of laws and regulations makes it difficult to identify and form an objective view of suspicious transactions.
In this perspective, it is imperative that the PMLA suitably empower these professionals to collect relevant details and documents from their clients and to be able to pierce through the transaction trail. It is expected that the relevant professional bodies will soon issue additional guidance, over and above the existing overarching standards and guidance, to their members to facilitate effective compliance with the new requirements. The PMLA opens up newer professional opportunities for CAs, CSs and CMAs. However, they need to exercise proper care, be more circumspect and undertake a greater degree of due diligence.
Ashok Haldia is a chartered accountant. Views are personal, and do not represent the stand of this publication.
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