PMLA net widens; directors covered

The scope of the Money Laundering Prevention Act (PMLA), 2002, is being thrown wider as the government has resorted to the harsh law to crack down on shell companies and prepare for the compliance check by the Financial Action Task Force (FATF), in November.

Following chartered and expense accountants and company secretaries, the government has now included directors of companies, partners of companies, administrators of express trusts, and nominee shareholders as “reporting entities” under the law. Even individuals who arrange these officials for another person will be reporting entities, according to the Treasury Department’s notice late Tuesday.

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

Also, under the latest fiat, persons acting as incorporation agents of corporations and limited liability companies (LLP) and providing a registered office, business address or residence, mailing or administrative address for a corporation or an LLP or a trust qualify as Reporting Entities .

All of these individuals are expected to initiate know-your-customer (KYC) standards for a range of specified transactions of the entities involved, maintain relevant records and report to the Director of the Financial Intelligence Unit (FIU).

However, a large number of professional functions, such as assisting with filing returns, etc., would still be protected. Activities not required to be reported include activities performed as part of a lease, sublease, lease or other agreement for the use of land, building or space, the consideration of which is subject to income tax deduction.

Furthermore, any activity performed by an employee on behalf of his employer in the performance of or in connection with his employment, as well as any activity performed in practice by a lawyer, chartered accountant, cost accountant or company secretary, who is engaged in establishing a company to the extent of filing a declaration under the Companies Act are also excluded.

On May 3, when collective agreements, company secretaries and cost accountants were brought under the law, a series of transactions these professionals perform for their clients fell under the law. These include buying and selling real estate; management of client money, securities or other assets; management of bank, savings or securities accounts; organization of contributions for the formation, operation or management of companies and the formation, operation or management of companies, limited liability companies or trusts, and purchase and sale of business entities.

Amit Maheshwari, tax partner, AKM Global, said the new notification logically expanded many more services from professionals. “It excludes any activity carried on by a solicitor, chartered accountant, cost accountant or company secretary in practice, involved in the formation of a company to the extent that it is for the filing of a declaration as required under clause (b) of sub-section (1) of section 7 of the Companies Act, 2013,” he noted. The provision of such a statement in itself does not make it mandatory for the professional to keep a record or report any such transaction , he noted.

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The Center is seeking to strengthen standards for reporting entities in anticipation of the country’s assessment by the Financial Action Task Force on Counter-Terrorism and Anti-Money Laundering. An on-site evaluation by the FATF is scheduled for November this year.

Sanket Jain, partner of Pioneer Legal, said the purpose of the latest notice appears to be to close as many loopholes as possible to curb the threat of shell companies. “Now anyone who lends their office address to a shell company is a reporting entity under PMLA. This is the next step after bringing transactions of chartered accountants, company secretaries and cost accountants on behalf of their clients under the law,” he said.

Both the Ministry of Finance and the Ministry of Business Affairs (MCA) have been working to curb the creation of shell companies. The MCA had taken action against Chinese shell companies operating in the country last year and the Serious Fraud Investigation Office had launched investigations into 33 entities. Since then, it has taken a number of measures, such as stricter rules for companies to keep their accounts and registered offices to ensure that only genuine corporate entities are established.

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