CA Members reporting entities as per PMLA: ICAI Faqs

The Institute of Chartered Accountants of India (ICAI) has released FAQs on CA Members reporting entities as per PMLA.

The FAQs are as follows:

1. Which Act governs Money laundering offences?

Prevention of Money Laundering Act (PMLA), 2002 which came into force since 1st July 2005.

2. What is money laundering?

Money Laundering is the process of converting the tainted property (referred to as Proceeds of Crime – POC) acquired/obtained by carrying out specific offences (referred to as “scheduled offences” or “predicate offences”) as described in the Schedules under the Prevention of Money Laundering Act 2002, into the untainted property.

All or Any acts, directly or indirectly related to such proceeds of crime such as concealment, possession, acquisition, use, projecting or claiming it as untainted property is treated as an act of Money Laundering Offences.

The crux of Money Laundering is “scheduled offences” (Prescribed under the PMLA law) and generating property out of these offences i. e. POC.

A large number of criminal acts is done to generate some Property by the individual or group that carries out that act. When a criminal activity generates properties (which is tainted property), the individual or group (criminals) involved in that offence, may find some ways to convert that tainted property into untainted property without attracting legal attention. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. All this involves Placement, Layering & Integration (PLI).

This process (PLI) is of critical importance, as it enables the criminal to enjoy these POC properties without explaining their illegal source.

Money laundering is a serious crime that facilitates various illegal activities, such as drug trafficking, corruption, fraud, and terrorism financing.

3. What is a money laundering offence under the PMLA Act?

Section 3 of PMLA, 2002 defines it as “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use or projecting or claiming it as untainted property shall be guilty of offence of money-laundering.” This definition also has two Explanations to it and has to be read in its entirety.

The offense of money laundering involves knowingly engaging in financial transactions that conceal, possess, acquire, use or disguise the origins of illicitly obtained funds. It typically involves three stages:

• Placement (introducing illicit funds into the financial system),
• Layering (conducting complex transactions to obscure the audit trail),
• Integration (legitimizing the illicit funds by integrating them back into the formal economy).

Hence what is important to note is that the “Proceeds of crime” (POC) arising from the violations of certain sections of about 30 different laws (referred to as “Scheduled offence”) results in “tainted property” and any activity/process of the type as stated above (including its use, acquisition, possession etc.) or projecting it as “untainted property” is the offence of Money Laundering.

4. Who is covered under PMLA?

Every Person – be it an Individual, HUF, firm, company, AOP/BOI, agency/ branch etc. – whosoever directly or indirectly attempts to indulge or knowingly assists or is a party or is involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use or projecting or claiming it as untainted property shall be guilty of offence of money-laundering and can be covered u/s 3 of the PMLA.

5. Who is a reporting entity (RE)?

Reporting entity means an entity defined u/s 2(wa) of the PMLA Act 2002 and includes a banking company, financial institution, intermediary or a person carrying on a designated business or profession like Inspector General of Registration, Real estate agents, persons carrying on activities for playing games of chance/casinos or as notified by the Central Government, are all Reporting Entity.

6. Who is a beneficial owner?

Beneficial owner u/s 2(fa) means an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.

The beneficial owner is applicable only to legal entities such as companies, partnership firms, trusts etc. The criteria are based upon the percentage of shareholding or profit sharing.

7. Who is a person?

Every Person – be it an Individual, HUF, firm, company, AOP/BOI, artificial juridical person, agency/office/branch that is owned or controlled by any of the entities.

This definition is similar to the definition of “person” found in various laws, such as the Income Tax Act of 1961, the Companies Act of 2013, and the GST Act of 2017.

8. What is FATF and Mutual Evaluation? What is its relevance?

The Financial Action Task Force (FATF) is an intergovernmental organization formed by the G7 in 1989. It is the global money laundering and terrorist financing watchdog. FATF sets international standards to ensure national authorities can effectively go after illicit funds linked to drug trafficking, the illicit arms trade, cyber fraud and other serious crimes.

FATF develops and promotes global Anti-Money Laundering and Combating the Financing of Terrorism (AML/ CFT) standards, known as the FATF Recommendations. These standards provide a framework for countries to adopt and implement effective measures to combat financial crimes.

FATF conducts mutual evaluations of member countries to assess their compliance with the FATF Recommendations with regard to their financial system, their reporting on money laundering, and counter terrorist perspective. These evaluations help identify weaknesses in countries’ AML/ CFT systems and provide recommendations for improvement. FATF also classifies jurisdiction/countries like “Black” or “Grey” lists depending upon whether they are high-risk or they are actively working with the FATF to address strategic deficiencies in their regimes or they have strong financial risk systems in place.

Overall, the FATF plays a crucial role in promoting and strengthening the global AML/ CFT regime by setting standards, evaluating countries compliance and fostering international cooperation to combat financial crimes.

India has been a member of FATF since the year 2010 and shall be assessed in the fourth round of mutual evaluations this year i.e. 2023.

9. What may be the perspective of or intention behind the issue of the relevant Notification dated 3rd May, 2023? And does this notification means covering CAs under Money Laundering Offences?

The intention behind this notification may be an effort to assimilate, adopt, conform & effectively implement the FATF recommendations. This notification may be intended to strengthen and enhance reporting mechanisms to identify potential offenders.

This notification makes Chartered Accountants (carrying out specified activities as stated in the said notification on behalf of their client) a “reporting entity” as defined u/s 2(wa) of PMLA.

10. Who is the Enforcement Agency?

The Directorate of Enforcement (ED) acts as an Enforcement Agency. The Agency conducts the investigations of Money Laundering Offences.

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