PMLA net widens; directors covered

The ambit of the Prevention of Money Laundering Act (PMLA), 2002 is being cast wider, as the government has resorted to the stringent law to clamp down on shell companies and prepare itself for the compliance review by the Financial Action Task Force (FATF), in November.

After chartered & cost accountants and company secretaries, the government has now included directors of companies, partners of firms, trustees of express trusts as well as nominee shareholders as “reporting entities” under the Act. Even persons arranging these officials for another person will be reporting entities, according to the notification issued by the finance ministry late Tuesday.

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The immediate trigger for the move, which greatly increases these professionals’ compliance burden and even expose them to the possibility of being prosecuted under PMLA for any lapses, is believed to be the revelation that several shell companies acted as cover for the recently banned Chinese apps and these were assisted by professionals.

According to the latest fiat, persons acting as formation agents of companies and limited liability partnerships (LLP) and providing a registered office, business address or accommodation, correspondence or administrative address for a company or a LLP or a trust are also designated as reporting entities.

All these persons would be expected to initiate know your customer (KYC) norms for a set of specified transactions of the entities concerned, maintain the relevant records and report them to director of the Financial Intelligence Unit (FIU).

However, a host of professional functions like assisting in filing of declarations etc would still be protected. The activities that would not have to be reported include those carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement for using land, building or any space where the consideration is subject to deduction of income tax.

Further, any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment, and any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration under the Companies Act have also been excluded.

On May 3, when CAs, company secretaries and cost accountants were brought under the Act, a set of transactions, which these professionals carry out for their clients, were covered under the law. These included buying and selling of any immovable property; managing of client money, securities or other assets; management of bank, savings or securities accounts; organisation of contributions for the creation, operation or management of companies and creation, operation or management of companies, limited liability partnerships or trusts, and buying & selling of business entities.

Amit Maheshwari, tax partner, AKM Global, said the new notification has logically expanded many more services provided by professionals. “It excludes any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under clause (b) of sub-section (1) of section 7 of Companies Act, 2013,” he noted. Providing such declaration itself will not make it obligatory on the professional to maintain a record or to report such a transaction, he noted.

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The Centre is trying to strengthen norms on reporting entities ahead of the country’s assessment of the Financial Action Task Force for counter terrorism and anti-money laundering measures. An on site evaluation by the FATF is scheduled in November this year.

Sanket Jain, partner, Pioneer Legal, said the objective of the latest notification seems to be to plug as many loopholes as possible to curb the menace of shell companies. “Now anyone who is in the business of lending their office address to a shell company has been made a reporting entity under PMLA. This is the next step after bringing transactions by chartered accountants, company secretaries and cost accountants for their clients under the law,” he said.

Both the finance ministry and the corporate affairs ministry (MCA) have been working to curb the incorporation of shell companies. The MCA had, last year, initiated action against Chinese shell companies operating in the country and the Serious Fraud Investigation Office had launched investigations into 33 entities. Since then, it has taken a number of steps such as more stringent rules for companies for keeping their books of accounts and registered offices to ensure that only genuine business entities are set up.