Not long after Govt.’s Notification bringing certain activities by CAs, CS and CWAs under the PMLA ambit viz. handling of clients assets, money etc., another Notification has specified certain activities that need to be taken note of by the other business entities rendering similar services. While the latter notification exempts certain activities, many critics have assailed these notifications as a brazen attempt to expand the law through gazette notification. These serially issued notifications portray that the Government wants all persons to become aware of the PMLA provisions and the specific duties cast under that Act on them.

In this thought-provoking article, CA S. Ramanujam points out the interesting features of the second notification that defines “activities”, which include normal business transactions, in contradistinction with professional activities carried out by professional firms which cannot be in the normal parlance called as business activity. Laying emphasis on the clarification regarding the word “activities” specified in the second notification, the Author states that “…once the law has mandated a professional to carry out duties in accordance with certain regulations, the same cannot again become a reportable activity under another law, that too, through a notification.”

Stating that the 2 back-to-back notifications focus on the role of professionals and other entities who help businessmen to organise their business in an orderly manner by complying with the laws, he elaborates that the prior notification defined the reportable transactions by professionals of 3 accounting bodies, while the latter notification identifies specific activities carried out by similar business entities for and on behalf of their clients. Interestingly, noticing that the 2 notifications are issued by falling back on 2 words of the same sub-clause in Sec. 2(1)(sa)(vi) of the Act, in conclusion, the Author quips “Novel approach witnessed above: Redefine the words of definition in the same clause and expand the law through notifications!”

PMLA Second Notification - Stretching the Law?

Introduction:

In the earlier article on the subject of the PMLA notification dated 3-05-2023 (referred as PMLA first notification), an attempt was made to explain the rationale and the impact the said notification will make on the professionals belonging to the three Institutes. Even before the ink could dry, another notification was issued on 9-05-2023 (second notification), which has specified certain activities that need to be taken note of by (broadly) the other business entities rendering similar services, thereby making the distinction in law, ostensibly to avoid future disputes in Courts—between business and profession. In the second notification certain activities are exempted. Many critics have assailed these notifications as a brazen attempt to expand the law through gazette notification, whereas the government is expected to justify their action by contending that it is their duty to put at rest some doubts at the threshold itself by identifying the roles played by professionals and others. Ultimately, what is revealed from these notifications are that the government wants all persons to become aware of the PMLA provisions and the specific duties cast under that Act on them. Looking at the short gap between both the Notifications, one would not be surprised if some more notifications are slated to follow soon!

Source of the notification and the duty cast on the business entities:

As explained in the earlier article, a duty is cast on reporting entities, which as per the definition Sec 2 Clause (va), includes persons carrying on a designated business or profession. It is under this clause, that all the CAs, CWAs and CS were notified and included through the first notification. Having notified the professionals, the government, through the same notification specified certain financial transactions carried by these professionals on behalf of their clients in the course of carrying on their professional activities. There were five activities notified under the first notification, which, inter alia, also included the creation, operation or management of companies, limited liability partnerships, trusts and buying and selling of business entities.

Contents of the present notification:

This is extracted below:

In exercise of the powers conferred by sub-clause (vi) of clause (sa) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003) (hereinafter referred to the as the Act), the Central Government hereby notifies that the following activities when carried out in the course of business on behalf of or for another person, as the case may be, as an activity for the purposes of said sub-clause, namely:- (i) acting as a formation agent of companies and limited liability partnerships; (ii) acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships; (iii) providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust; (iv) acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and (v) acting as (or arranging for another person to act as) a nominee shareholder for another person.

Explanation.–For removal of doubts, it is clarified that the following activities shall not be regarded as activity for the purposes of sub-clause (vi) of clause (sa) of sub-section (1) of section 2 of the Act, namely:- (a) any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961 (43 of 1961); or (b) any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or (c) any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under clause (b) of sub-section (1) of section 7 of Companies Act, 2013 (18 of 2013); or (d) any activity of a person which falls meaning of an intermediary as defined in clause (n) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003).

Some interesting features of this notification which defines `activities‘ are:

• “…following activities which are carried out in the course of business on behalf or for another person as the case may be, as an activity…”
• The list of activities also includes normal business transactions (in contradistinction with professional activities carried out by professional firm which cannot be in the normal parlance called as business activity)

Instances from the business world:

As revealed from the above notification, many of these activities undertaken by the professionals and other service providers involve meticulous compliance with the procedure prescribed under the respective Acts, including filling up of forms, uploading in the government portal, etc. especially under the new electronic mode of prescribed for compliances. This is a complicated task and can be undertaken only by qualified professionals and by other experienced persons forming part of business entities. E.g., incorporation of companies, LLPs, etc. are administered by the Registrar of Companies falling within the Ministry of Corporate Affairs (MCA) and most of these activities are carried out mainly by company secretaries or separate entities providing specialised services of this nature. On many occasions, these professional firms or these specialised entities will have readymade, off the shelf- companies incorporated by some of their staff or friends and the control of these companies will be transferred immediately to the businessman who wants to urgently capture a business opportunity by using this as his company to apply for licences or tenders from governments, after changing the name to suit his interests. All these are common occurrences in the world of business and the present notification lists out these as activities under the definition clause so as to be covered as reportable activities. Similarly, readers can easily visualise the services that could be obtained for setting up any business in a new place, or country, etc. where the only available help comes from professionals residing in that place who provide variety of services including temporary registered office, business address, address for correspondence or becoming a nominee shareholder for a short time in a newly incorporated company for client. Similar services are also provided on behalf of Business Trusts or Alternate Investment Funds, etc. where the services rendered by these professionals or the specialised entities becomes invaluable.

Comments on the Explanation:

Coming to the exceptions in the notification, even these instances can be easily visualised by any reader. For Instance, a professional or other person / entity may let out part of his building on lease or sublease or under a tenancy agreement to a new company by charging rent. Under sec 194I TDS is deductible on rent paid beyond threshold limit by the tenant. The PMLA notification clarifies that such commercial rental arrangements are not covered under the word activities specified in the notification.

Under the Companies Act, one of the important documents scrutinised by the Registrar of Companies before granting the Certificate of Incorporation of a company is to look at the declaration in the prescribed form as stipulated in in sec 7 (1) (b) of the Act. This clause is extracted below:

A declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company, and persons named in the Articles as manager, director or secretary of the company that all the requirements of the Act and the Rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with.

Obviously, it flows from the above, that once the law has mandated professional to carry out duties in accordance with certain regulations, the same cannot be again become a reportable activity under another law, that too, through a notification. Hence this exception is a natural corollary, and one should be thankful for small mercies!

On the same basis, even the employees’ services and intermediary services (as defined under PMLA) are exempt if it is carried on behalf of the employer or in relation to his employment or in the course of carrying on any activities of an intermediary .

Conclusion:

The two notifications issued serially again brings to focus the role of professionals and the other entities who help businessmen to organise their business in an orderly manner by complying with the laws. Given the fact these are highly-specialised and constantly-evolving subjects consequent to frequent changes in the laws / procedure, the task of setting up business is to say the least—a largely cumbersome first step in setting up the business. Looking at the legal aspects of these notifications, the first notification defined the reportable transactions by the professionals of the three accounting bodies by bringing them in to the fold of `persons carrying on the designated businesses or professions’ and simultaneously prescribing the reportable transactions carried out by them on behalf of their clients during the course of their professional activities. The second notification identified specific activities carried out by similar business entities while carrying the same for and on behalf of their clients. It is interesting to note that both the notifications are issued by falling back on two words of the same sub-clause in the definition clause—2 (1)(sa)(vi).

Novel approach witnessed above: Redefine the words of definition in the same clause and expand the law through notifications!

Law (sometimes) shrinks, and notification stretches it!