Date: 11/05/2023

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources; Financial Sector Reforms, PMLA.

Key Phrases: Regulated Entities, FATF, Virtual digital Asset, Chartered accountants, Cost accountants, Company secretaries, PMLA, Money Laundering, Regulatory Framework, Enforcement Directorate.

Context:

• Recently, the government has designated chartered accountants, cost accountants and company secretaries as reporting entities under the PMLA.
  • Till now, PMLA covered entities such as financial institutions, including banks, operators of games of chance, casinos, real estate agents as well as dealers of precious metals.

Key Highlights:

• Over a month ago, the government had also widened the ambit of reporting entities under money laundering provisions to incorporate more disclosures for non-governmental organizations and defined politically exposed persons (PEPs) under the PMLA in line with the recommendations of the FATF.

CAs, CSs under PMLA:

• The new changes have been made in the sub-clause (vi) of clause (sa) of sub-section (1) of section 2 of the PMLA, which defines different categories of persons covered under the law.
• Under this, their real-time reporting responsibilities on five main categories of specified activities, undertaken by them on behalf of their clients, have been spelt out.
• The five activities listed out in the latest PMLA notification are:
  • Buying and selling of any immovable property;
  • Managing of client money, securities or other assets;
  • Management of bank, savings or securities accounts;
  • Organization of contributions for the creation, operation or management of companies and limited liability partnerships or trusts,
  • Buying and selling of business entities.
• This means that the professionals will be required to examine the genuineness of the ownership and source of funds of clients.
  • Accounting professionals must carry out Know your customer (KYC) verification for their clients and maintain the records to furnish information to the authorities as and when asked for.

Need for Tightened Legislative grip:

• It is needed to align the country with the recommendations of the Financial Action Task Force (FATF), meant to combat money laundering and terrorist financing.
• The FATF is expected to review India’s performance later this year in introducing policies to combat this global scourge.
  • However, the latest directive has left out lawyers, notaries and independent legal practitioners from reporting obligations under the five heads mentioned above, despite its being suggested by the FATF rules.
  • There is every reason to believe that accountants and lawyers are equally complicit in devising various money laundering methods such as creating a maze of shell companies and complex legal structures to obfuscate the money trail.
  • However, the PMLA reporting obligation extends to casino operators, crypto players, real estate agents and dealers in precious metals.
• Another reason is mushrooming of fly-by-night Chinese apps in the fintech space has been abetted and aided by accountants acting as a front for them and directly managing their monies.

Impacts of this Move:

• India is taking the lead in reining in professional enablers vis-a-vis even the developed countries, leave alone nations such as Pakistan and Panama.
• The amendments are expected to aid investigative agencies further in their probe against dubious transactions involving shell companies and money laundering.
• The inclusion of CAs under the PMLA will also enhance their accountability and liability.
• The compliance cost will increase substantially and non-compliance may lead to severe penalties and legal action against professionals.

Way Forward:

• The PMLA has been under the scanner for its powers of overreach, with the Supreme Court last year making certain observations against its use for relatively minor offenses.
  • This should be avoided to ensure that India does not suffer a reputation hit on account of ease of doing business.
• The spotlight on the accounting and legal fraternity brings into focus the role of their self-regulatory bodies.
• The Institute of Chartered Accountants of India has been less than transparent in its disciplinary actions in cases of professional misconduct.
  • Therefore, the onus will be on it as well to mend its ways.
• The Centre’ has done well to ramp up its scrutiny under the Prevention of Money Laundering Act of practicing chartered accountants, company secretaries and cost accountants.
• The Centre has also been enhancing reporting guidelines of accountants and disclosure regulations by companies as part of its efforts to improve corporate governance practices, and to check generation of unaccounted wealth, diversion of funds from businesses, bogus inter-corporate transactions and laundering of funds.

Conclusion:

• It is to be hoped that stringent, almost- real-time reporting requirements will help uncover nefarious practices such as round-tripping through shell companies in obscure jurisdictions, the fallout of which could be tax evasion, market manipulation and in some cases cross-border terrorist financing.

Source: The Hindu BL

Mains Question:

Q. What can be the possible implications of designating the chartered accountants, cost accountants and company secretaries as reporting entities under the PMLA? (250 Words).