Core accountancy tasks still outside PMLA ambit, says ICAI

The Institute of Chartered Accountants of India (ICAI) has clarified that only those chartered accountants (CAs) that carry out “financial activities” on behalf of their clients will become reporting entities under the new PMLA rules notified on May 3. The core functions of assurance, audit and taxation remain outside the purview of the notification, allaying fears that routine services and transactions would come under its ambit.

The financial activities include buying and selling of immovable property, managing client monies, bank accounts or other assets and creation, operation or management of companies, LLPs or trusts. This would, for example, cover CAs and company secretaries organising contributions from dummy shareholders or lenders for a company. Or those involved in investing directly into properties (including payment of token amount) or buying businesses.

There are instances where CAs play a role in money laundering, either directly or indirectly, said experts. Such CAs now need to report the movement of funds (exceeding ₹10 lakh in most cases) to the Financial Intelligence Unit of India.

ICAI has reiterated that a professional accountant in public practice should not assume custody of client monies or other assets unless permitted to do so by law. However, it has clarified that the reporting entities, its directors and employees will not be liable for any civil or criminal prosecution for furnishing information.

Exclusions and inclusions

Auditing, accounting, furnishing due diligence reports and tax returns and CAs providing services as corporates are not covered under the new rules, according to ICAI. CAs acting as official liquidators, insolvency professionals, trustees and independent or nominee directors are excluded as well. Services under FEMA, MCA and RERA and payment of taxes are not covered if the CA is not managing any funds or bank accounts of the clients.

Project financing, recovery consultants of banks, insurance brokers and CAs holding power of attorney on behalf of clients for carrying out specified financial activities are covered. CAs acting as executors of wills are covered if a client relationship is established.

“The clarifications are helpful in understanding certain nuances arising from the interpretation of the PMLA notification. It also puts to rest apprehensions about routine services and transactions getting covered under PMLA,” said Harshal Bhuta, partner, PR Bhuta & Co.

For instance, there were concerns about the practice of CAs making last-minute payment of tax and government fees on behalf of clients. ICAI has clarified that this, by itself, would not amount to a ‘financial transaction’, said Bhuta.

“The FAQs provide CAs with the necessary dos and don’ts while dealing with clients, as well as tools and processes to be compliant. To an extent, however, it is important for CAs to act as whistle blowers if they find any suspicious financial transactions,” added Sandeep Sehgal, partner, AKM Global.

Role of reporting entities

Every reporting entity has to verify the identity of its clients along with the beneficial owner, carry out enhanced due diligence and maintain records of suspicious transactions that have no economic rationale or bona fide purpose, including those in cash, for a minimum of five years.

According to Vinod Kothari, director at Vinod Kothari Consultants, it is counter-intuitive to expect a CA involved in unprofessional or illegal activities to report the same to FIU-IND. “The larger impact of the notification is to put practising professionals on notice and extend the scope of PMLA to professionals and fiduciaries. It is less of a compliance burden and more of a deterrent against active participation in money laundering,” he said.

“ICAI has given an elaborate guidance on the issue, which may hold good in most cases but may misguide in some. ICAI is a statutory body for chartered accountants but it does not give them the power to interpret the PMLA rules. In the process, the ICAI has ventured into the domain of the judiciary and PMLA regulatory body,” said RN Dash, an advocate and former member and acting chairman of the Appellate Tribunal of PMLA.

The government had designated chartered accountants, cost accountants and company secretaries as reporting entities under the new PMLA rules notified on May 3. Earlier, only financial institutions such as banks, operators of games of chance, casinos, real estate agents and dealers of precious metals were covered.