Expectations on due diligence from the professional service sector 2023


By Govind Balachandran, is the CEO of SignalX, an AI-enabled due diligence automation platform.

In a significant regulatory shift, the Government of India has expanded the scope of the Prevention of Money-Laundering Act (PMLA), 2002, to include practicing professionals such as Chartered Accountants (CAs), Company Secretaries (CS), and Cost and Works Accountants (C&WA). This move, announced through Ministry of Finance notifications on the 3rd and 9th of May, 2023, has reclassified these professionals as ‘persons carrying on a designated business or profession.’ As a result, they must now adhere to the stringent compliance obligations under the PMLA. This development underscores the growing emphasis on customer due diligence in the professional service sector. 

Expanded Scope of PMLA 

Interestingly, this regulatory expansion echoes a similar notice issued by the Securities and Exchange Board of India (SEBI) in December 2022 for Alternative Investment Funds (AIFs). SEBI highlighted the need for AIFs to conduct enhanced due diligence on their investors, signaling an industry-wide shift towards stricter compliance. 

The notifications issued in May 2023 significantly broadened the range of activities subject to the PMLA for these three categories of professionals. The first notification, dated 3rd May, included these professionals under the clause ‘person carrying on a designated business or profession.’ The specified activities under this designation spanned buying and selling immovable property, managing client money, securities, or other assets, managing bank or savings accounts, organizing contributions for the creation or management of companies, and overseeing the operation or management of companies, LLPs, trusts, and other business entities. 

The 9th May notification further expanded this scope to include five additional areas of professional conduct. These encompassed acting as a formation agent of companies and LLPs, holding (or arranging for) positions as a director or secretary of a company or partner of a firm, providing registered office or business addresses for companies, LLPs, or trusts, acting as a trustee or nominee shareholder, among others. 

Enhanced Due Diligence and Reporting Obligations 

This regulatory expansion positions these professionals as ‘reporting entities,’ responsible for maintaining detailed transaction records of their client engagements. This includes verifying the client’s identity and beneficial owners through strict KYC protocols, and preserving these records for five years from the transaction date or, in certain cases, five years from the end of the client relationship. 

Furthermore, the new regulations mandate Enhanced Due Diligence (EDD) for specific transactions involving high-value imports, large cash withdrawals or deposits, and foreign exchange transactions exceeding a certain threshold. If a client fails to provide the necessary information, professionals are obligated to decline the transaction. 

The New Paradigm of Professional Due Diligence 

In light of these regulations, CA, CS, and Cost and Works Accountants are now required to significantly enhance their approach to customer due diligence. This involves performing EDD for specific transactions, especially those that could be potentially linked to money laundering. Professionals are required to maintain detailed records of transactions and interactions for at least five years, which can be presented to PMLA authorities when necessary. 

Moreover, the conventional EDD checks must now be expanded beyond Politically Exposed Persons (PEP) screenings, sanctions lists, and adverse media checks. The new expectations demand a deeper level of scrutiny, requiring professionals to investigate broader areas such as regulatory defaults, affiliations with other companies, involvement in insolvency and bankruptcy cases, economic defaults, and adverse litigations. 

Leveraging Automated Technology to meet Due Diligence requirements under PMLA 

With these new regulations, professionals must broaden their understanding and approach towards more enhanced customer due diligence. This involves the adoption of robust due diligence systems that can navigate these complex requirements. Advanced due diligence automation tools, can significantly assist in this regard. These tools simplify the process of conducting comprehensive checks, ensuring that professionals can meet their compliance obligations effectively and efficiently. 

In conclusion, this regulatory shift signals a new era of due diligence in the professional service sector in India. It places a significant responsibility on professionals to ensure compliance with the expanded scope of the PMLA, emphasizing the importance of maintaining meticulous records and conducting thorough due diligence. As such, professionals are urged to leverage technology and adopt comprehensive due diligence systems to navigate this complex landscape and remain compliant. These new regulations, reflecting similar expectations set by SEBI for AIFs, are likely to set the tone for future regulatory practices across the industry. By keeping abreast of these changes and adopting the necessary measures, professionals can ensure their compliance with PMLA obligations, safeguarding their clients and contributing to the wider fight against money laundering and financial crime. 


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