Penalties for Non-Compliance under PMLA

Shubhangi Jain

29 May, 2023

The objective of the enactment of the Prevention of Money-laundering Act, 2002, i.e. PMLA (the Act), was to combat the menace of money laundering in India. The Act provides for the prevention of money laundering and the confiscation of property derived from or involved in money laundering, along with requiring certain professionals the compliance with Anti Money Laundering measures (AML)during the execution of financial transactions on behalf of their clients. The Ministry of Finance, Department of Revenue issued a notification on May 03, 2023, amending Section 2 of the Act. According to the amendment, financial transactions executed by practising Chartered Accountants (CAs), Company Secretaries (CSs), and Cost and Works Accountants (CWAs)^[1] on behalf of their clients shall now come under the ambit of the PMLA Actas Reporting Entities(RE). The present article shall discuss the penalties of non-compliance under the Act, its applicability to the reporting entities mentioned in the notification, and the penalties imposed on them in the event of non-compliance.

The offence of Money Laundering under PMLA

If there is a direct or indirect attempt by anyone to indulge or assist or be a party after having due knowledge or actual involvement in any process or activity in connection with the proceeds of crime, including its possession, concealment, acquisition or use and the same is being projected or claimed as untainted property shall be guilty of the offence of money-laundering.

For the purpose of removal of any doubts, it has been clarified that –

1. a person would  be guilty of the offence of money laundering upon being found to have a direct or indirect attempt to indulge or assist or be a party after having due knowledge or actual involvement in one or more of the below-mentioned processes or activities having a connection with the proceeds of crime, namely:—]
   • Concealment; or
   • Possession; or
   • Acquisition; or
   • Use; or
   • Projecting as untainted property; or
   • Claiming as untainted property in any manner whatsoever;
2. The process or activity connected with the proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

Punishment for Money Laundering

If there is a commission of an offence of money laundering by anyone, the person shall be punished with rigorous imprisonment for a term not being less than 3 years with a possibility of extension of up to 7 years and would also be liable to a fine.

Provided that wherein  the proceeds of crime involved in money laundering are related to any offence provided under para 2 of Part A of the Schedule, the provisions shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been substituted

Entities Covered under PMLA

The PMLA is applicable to a wide range of professionals, including CAs, CSs, and CWAs, among others. These professionals are called “Reporting Entities” as per the Act. The Reporting Entities have an obligation in respect of the maintenance of records of financial transactions executed by them on behalf of their clients, along with reporting the suspicious transactions to the appropriate authorities.

Applicability of PMLA to CAs, CSs, and CWAs

As per the PMLA, CAs, CSs, and CWAs are considered “Intermediaries” and are required to comply with the anti-money laundering (AML) measures prescribed under the Act. This means that these professionals must carry out the verification of the identity of their clients, maintain records of all transactions, and report any suspicious transactions to the authorities.

As intermediaries, they are obligated to carry out CDD i.e. Customer Due Diligence for their clients. This involves the verification and identification of the client for the determination of the business relationship. The CDD process also includes the identification of the beneficial owner of the client,i.e. the person who has the ultimate ownership or control over the activities of the client.

 CAs, CSs, and CWAs must maintain records of all transactions executed by them on behalf of their clients. The retention of such records must be done for a period of at least 5 years from the date of cessation of the transaction.

In addition to maintaining records, CAs, CSs, and CWAs must report any suspicious transactions to the appropriate authorities. The reporting requirements are mandatory, and failure in respect of compliance with the same can result in penalties or even criminal prosecution.

Consequences and Penalties for Non-Compliance of PMLA attracted By Professionals

As per the Act, professionals classified as “Reporting Entities,” such as Chartered Accountants (CAs), Company Secretaries (CSs), and Cost and Works Accountants (CWAs), can attract penalties and consequences upon failure with regards to compliance with the anti-money laundering measures prescribed by the Act.

In the event of such failure, they may attract the following consequences and penalties:

• Monetary Penalty: The Director of the Enforcement Directorate is empowered under PMLA to impose a monetary penalty of up to Rs. 10 lacks on a Reporting Entity for each violation of the Act.
• Imprisonment: In case of a willful violation of the provisions of the PMLA, a RE may be punished with imprisonment for a term that may extend up to 7.
• Suspension/Cancellation of License: The PMLA also empowers the Director of the Enforcement Directorate the suspension or cancellation of the registration or license of a Reporting Entity in case of a violation of the provisions of the Act.
• Damage to Reputation: Non-compliance with the provisions of the PMLA can damage the reputation of a Reporting Entity, resulting in a loss of clients and business.

It must be noted that the consequences and penalties for non-compliance with the PMLA can be severe and may have long-term consequences for the professional and their business. Therefore, the Reporting Entities must ensure compliance with the anti-money laundering measures prescribed under the Act and, along with reporting any suspicious transactions to the appropriate authorities, for the avoidance of penalties and consequences.

Under the PMLA, an intermediary is defined as a person carrying out a profession dealing with the purchasing and selling of goods or services or the providing of services related to lending, investment,or management of money or assets, including CAs, CSs, and CWAs but does not explicitly include lawyers or advocates.

Advocates/Lawyers are not explicitly included under the ambit of the PMLA. However, they must comply with the provisions of the PMLA to the extent of them acting as intermediaries in financial transactions.

However, lawyers and advocates may be considered intermediaries under certain circumstances. For example, if a lawyer or advocate acts as a conduit for a client’s financial transactions or if they provide advice or assistance in the buying or selling of assets or investments, they may be considered intermediaries under the PMLA.

In such cases, lawyers and advocates must comply with the anti-money laundering measures prescribed under the PMLA. This includes conducting Customer Due Diligence, maintenance of records of transactions, and reporting any suspicious transactions to the authorities.

They also come under the ambit of other laws and regulations regarding AML  and counter-terrorism financing. For example, the Bar Council of India has issued guidelines requiring compliance with AML  measures by the lawyers, and the Financial Action Task Force (FATF) has recommended that lawyers comply with the anti-money laundering requirements.

Conclusion

The PMLA is a crucial piece of legislation aiming towards the prevention of the circulation of illicit money in India. It requires certain professionals, including CAs, CSs, and CWAs, to comply with anti-money laundering measures during the execution of financial transactions on behalf of their clients in order to avoid the penalties of non-compliance under PMLA.

By complying with the prescribed requirements, CAs, CSs, and CWAs can help in the prevention of money laundering and the promotion of a more transparent and accountable financial system in India.  

This notification is a step towards ensuring that professionals being the intermediaries in financial transactions are being held accountable for their actions as well as complying with the prescribed AML measures.

Read our Article: Obligations of Banking Companies, Financial Institutions and Intermediaries under PMLA, 2002