On May 09, 2023, the Department of Revenue, Ministry of Finance issued notification S.O. 2135(E), bringing individuals such as directors, secretaries, partners, trustees, and formation agents within the ambit of the Prevention of Money-laundering Act, 2002 ("PMLA"), when acting on behalf of or for another person.
Under the PMLA, "reporting entity" is defined as "a banking company, financial institution, intermediary or a person carrying on a designated business or profession". The notification designates the following activities, when carried out in the course of business on behalf of or for another person, as the case may be, to fall within the ambit of "person carrying on a designated business or profession":
- acting as a formation agent of companies and limited liability partnerships;
- 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 limited liability partnerships;
- providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership 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.
However, the following activities are exempt:
- any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961;
- any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment;
- 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;
- any activity of a person which falls within the meaning of an intermediary as defined in clause (n) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002.
Thus, persons carrying on the above activities (which are not exempt) will now fall within the definition of "reporting entities" under the PMLA and will, consequently, be required to comply with all obligations levied on reporting entities. These include requirements to verify identity of their clients and the clients' beneficial owners (using Aadhaar, passport, etc.), maintain records of transactions and documents pertaining to identity of clients and beneficial owners, submit records to the Director (appointed under the PMLA) when called for, and enhanced diligence for specified high-value transactions.
The intent is for reporting entities to conduct adequate identity verification of the clients for whom they are undertaking transactions as well as the beneficial owners of such clients, to be able to ascertain who the ultimate beneficiary of the transaction is. Further, reporting entities are required to maintain records of transactions to the extent that the entire transaction can be reconstructed, if needed.
Non-compliance under the PMLA can render a reporting entity liable to monetary penalties up to INR 1 lakh per failure.
This notification comes less than a week after the May 3rd notification by the Ministry of Finance, bring chartered accountants, company secretaries, and cost and work accountants undertaking certain transactions within the ambit of the PMLA.
These recent moves by the central government appear to be towards strengthening the nation's anti–money laundering framework to curb illicit activities conducted by means of incorporation of shell companies, using professionals to act as dummy directors, etc. to mask the original perpetrators and beneficiaries of such acts. Only last year, in the midst of the crackdown on the Chinese loan app racket, authorities were discovering shell companies being used to route transactions to and from persons outside India and Indian nationals being engaged to incorporate companies in India, including filing the relevant documentation, and even being appointed to various designations in such companies, including directors and management roles. Now, individuals acting as directors or those providing registered offices for companies, for example, will be saddled with these additional obligations to enable identification of clients, reconstruction of transactions, etc. and will be faced with penalties for non-compliance.
These notifications, along with the recent amendments to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, also attain significance in light of the upcoming Financial Action Task Force (FATF) assessment of India, scheduled for late 2023.
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