Modifications to anti-money laundering laws can negatively affect foreign investment

CAs are requesting further details regarding the recent notification from the Finance Ministry about expanding the scope of anti-money laundering regulations. They believe that this move could potentially hinder business operations and hinder the facilitation of foreign investments.

Industry insiders have revealed that Chartered Accountants (CAs) and company secretaries frequently serve as intermediaries for foreign companies establishing their presence in India. During the initial stages, these professionals often provide their own addresses for communication purposes.

Additionally, these professionals also assume the role of resident directors for foreign companies seeking to establish a presence in India and manage bank accounts on behalf of their clients.

Industry insiders assert that accountants lack the means to ascertain the authenticity of funds brought by an investor into India and verify their source, distinguishing between legitimate and laundered money.

Considering the upcoming assessment by the global watchdog on terrorism financing and money laundering, scheduled for later this year, the Finance Ministry has taken steps to strengthen and broaden the scope of the Prevention of Money Laundering Act (PMLA) in recent months.

As part of this effort, the PMLA now encompasses chartered accountants, cost accountants, and company secretaries if they engage in specific activities on behalf of their clients.

These activities include property transactions (buying and selling), overseeing bank accounts or other assets, and managing companies, limited liability partnerships, or trusts.

In an additional notification, the ministry stated that individuals and entities operating as ‘formation agents’ or serving as directors, secretaries, or partners would also fall under the purview of the PMLA provisions. This extension would also apply to individuals or entities providing business or correspondence addresses for companies, LLPs, or trusts.

According to industry sources, the activities specified in the notifications are commonly carried out by CAs on behalf of foreign companies attempting to establish their presence in India.

A source said that CAs are not responsible for tracing the money trail of companies bringing funds into India for business purposes. The task of verifying the source of investment lies with the Financial Intelligence Unit (FIU) and the Reserve Bank of India (RBI).

In the cases where CAs engage in activities that fall within the realm of temporary hand-holding and accounting support for facilitating foreign investment, the potential consequence would be a monetary penalty rather than the stringent provisions of the PMLA law.

For any clarifications/feedback on the topic, please contact the writer at samiksha.swayambhu@clear.in