Ahead of India’s mutual evaluations by the Financial Action Task Force (FATF), the Union government has taken several measures to implement the intergovernmental body’s recommendations, made following the 2010 review, which includes notification of practising Chartered Accountants, Company Secretaries, and Cost and Management Accountants as reporting entities.
The FATF carries out the review to determine whether its recommended measures to curb money laundering and terror financing have been taken by the member country and if they are effective. India’s on-site assessment is expected to be carried out in November.
“On May 3 this year, the Finance Ministry had issued a notification designating the three categories of finance professionals as ‘persons carrying on a designated business or profession’ under the Prevention of Money Laundering Act (PMLA). The law provides that a ‘reporting entity’ means a banking company, financial institution, intermediary, or a person carrying on a designated business or profession,” Ashish Chandra Singh, former Deputy Legal Advisor with the Enforcement Directorate (ED) and a practising lawyer, said.
Through another notification on May 9, 2023 the government brought five activities under the same preview. They included acting as a formation agent of companies and limited liability partnerships (LLP); and acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm, or a similar position in relation to other companies and LLPs.
Those providing a registered office, business address or accommodation, correspondence or administrative address for a company or an LLP or a trust; 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; and acting as (or arranging for another person to act as) a nominee shareholder for another person were also included.
Subsequently, the respective government departments also issued associated guidelines to be followed by the persons concerned.
Under the PMLA, a reporting entity has to maintain a record of all transactions (for five years), and documents evidencing the identity of its clients and beneficial owners, account files and business correspondence with them, and furnish information as and when sought by the designated authority.
Section 12AA of the Act lays down the additional responsibilities of a reporting entity. Prior to the commencement of each specified transaction, it has to verify the identity of its clients; examine the ownership and financial position, including sources of funds of the client; and record the purpose behind the specified transaction and the intended nature of relationship between the transacting parties.
If the client does not fulfil the conditions, the reporting entity must disallow the specified transaction. If the transaction is suspicious or likely to involve proceeds of crime, the entity has to increase the future monitoring of the business relationship with the client, including greater scrutiny of transactions. The information gathered while applying these enhanced due diligence measures has also to be maintained for five years.
“As per the FATF recommendations, lawyers would also have come under the definition of ‘reporting entity’. However, Sections 126 and 129 of the Evidence Act gives them the immunity of privileged communication with clients,” a government official said, adding that non-compliance by a reporting entity attracts monetary penalty not less than ₹10,000, which may extend to ₹1 lakh for each failure.
