INTRODUCTION
In light of the upcoming onsite review of India's regulations and supervision by the international money laundering watchdog i.e. Financial Action Task Force ["FATF"] in November 2023, the Government of India has in the recent past, introduced certain amendments to the Prevention of Money Laundering Act ["PMLA"]. The most recent amendment brought about in May 2023, have included certain Designated Non-Financial Businesses and Professions ["DNFBPs"], such as chartered accountants and individuals representing companies as 'reporting entities', requiring them to record all transaction undertaken on behalf of their clients.
News reports reveal that the Indian Government plans to introduce further amendments to include lawyers as 'reporting entities'.1 and require them to keep a record of all transactions with their clients and share any suspicious activity with authorities, as the country looks to strengthen its money laundering laws
Initial reactions to the news revolve around the fact that such amendments would create an irreconcilable tension between lawyers' ethical duties and AML/CTF obligations that would fundamentally change the nature of the lawyer / client relationship. In light of this, the present article analyses the required obligations of lawyers as DNFBPs under the FATF Recommendations, 2012 (as updated till February 2023) ["FATF Recommendations"] vis-à-vis the feasibility of encompassing them under this category, by bringing amendments to PMLA.
HISTORY AND BACKGROUND
FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering [AML] and counter-terrorist financing [CFT] standard.2
India has been a member country of FATF since 2010. One of the key recommendations and concern given by FATF to India is extension of its PMLA requirements to the full range of DNFBPs and ensure that they are effectively regulated and supervised. As per FATF Recommendations, DNFBPs, among other things, include lawyers3, notaries and other independent legal professionals encompassing sole practitioners, partners or employed professionals within the professional firms. In order to have a broader understanding of how lawyers and independent legal practitioners are sought to be covered by the FAFT Recommendations, Recommendation 22 and 23 have to be closely viewed.
LAWYERS AS DNFBPs UNDER THE FATF RECOMMENDATIONS
According to Recommendation 22 read with Recommendations 10, 11, 12, 15 and 7 of the FATF Recommendations, the DFNBPs are, inter alia, required to conduct customer due diligence and maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities, so as to provide, if necessary, evidence for prosecution of criminal activity.
However, Recommendation 22 (d) restricts this requirement for lawyers to only such situations where the lawyers and notaries are preparing for or carrying out transactions for their client concerning the following activities:
- buying and selling of real estate;
- managing of client money, securities or other assets;
- management of bank, savings or securities accounts;
- organisation of contributions for the creation, operation or management of companies;
- creation, operation or management of legal persons or arrangements, and buying and selling of business entities.
Further, Recommendation 23 while setting out certain other measures on lawyers and notaries, clarifies that lawyers, notaries or other legal professionals, are obligated to report suspicious transactions if and whenthey engage in a financial transaction on behalf of their Client. This mainly pertains to financial transactions conducted for vertical ownership structures where there is a parent company, or of any other type of legal person, exercising control and coordinating functions over the rest of the group together with its branches and/or subsidiaries, as also referred under paragraph (d) of Recommendation 22 reproduced above.
However, reference must also be made to the interpretative note to Recommendation 23 whereof, the countries while complying with these recommendations so far as they extend to lawyers or notaries, must also bear in mind, the following:-
- lawyers and notaries are not required to report suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege;
- legal professional privilege or professional secrecy normally
cover information lawyers, notaries or other independent legal
professionals receive from or obtain through one of their clients:-
- in the course of ascertaining the legal position of their client; or
- in performing their task of defending or representing that client in, or concerning judicial, administrative, arbitration or mediation proceedings;
- Countries may allow lawyers, notaries, other independent legal professionals and accountants to send their suspicious transaction report to their appropriate self-regulatory organisations [eg. Bar Council of India], provided that there are appropriate forms of cooperation between these organisations and the FIU. where lawyers, notaries, other independent legal professionals and accountants acting as independent legal professionals seek to dissuade a client from engaging in illegal activity, this does not amount to tipping-off.
The aforesaid recommendations when read with the interpretative notes thereto, brings out that the FATF is cognizant of attorney - client privilege doctrine when encompassing the lawyers under DFNBPs. FATF Recommendations attempt to bring only such money laundering activities within the scope of its purview which a lawyer or a notary may encounter while preparing for or carrying out transactions. Essentially stating that only such activities which, the client may intend to commit or was in the middle of committing and communicated this intent to the lawyer, the information is not under privilege. In other words, if a lawyer learns that his/her client intends to commit a crime or cover up a crime, the lawyer may be obligated to disclose this information to authorities.
WAY FORWARD FOR INDIA TO IMPLEMENT RECOMMENDATION 22 (d)
Legal professional privilege is essential to the foundational principles of access to justice and rule of law. It is the common law concept that makes all communications between a lawyer and their client confidential, and such confidentiality is protected by law. The law on attorney-client privilege is codified under Section 126 of the Indian Evidence Act, 18724. ["Evidence Act"]
The foundation of the aforesaid rule as laid down under Sections 126 to 129 of the Evidence Act is the protection of client and not the lawyer. The intention is to keep the communications confidential as between the advocate and the client which would otherwise lead to impossibility of conducting legal business and would open the floodgates for an advocate to be summoned as a witness against its own client. The language of Section 126 suggests that no advocate "shall at any time be permitted" to disclose such communication "unless with his client's express consent". Further, the rule laid down under Section 126 also applies to interpreters and clerks or servants of lawyers [Section 127 of Evidence Act].
However, as per the proviso to Section 126, this protection does not extend to communications made in furtherance of an illegal purpose or to any fact coming to the knowledge of the advocate since the commencement of his employment showing that a crime or fraud has been committed. The same are not protected.5
Under the applicable law, a client who has yet to commit a civil or criminal wrongdoing cannot disclose this information to a lawyer and expect the attorney-client privilege to keep the lawyer silent. This in general parlance is also known as Crime - Fraud Exception to the doctrine of attorney - client privilege. The crime-fraud exception holds that if the client intended to commit or was in the middle of committing a crime or act of fraud and communicated this intent to the lawyer, the information is not under privilege.
Thus, if FAFT Recommendations are to be followed in verbatim, no such amendments are required to be brought along as the proviso to Section 126 of the Evidence Act, 1872 does not in any case protect a communication made in furtherance of any [illegal] purpose. Therefore, if FAFT Recommendations are followed in verbatim, the concerns to adverse effect on attorney client privilege are unfounded.
Therefore, so far the government intends to bring amendments in line with the FAFT Recommendations, the same can be encompassed within the already existing exceptions to attorney - client privilege and no separate amendment needs to be brought about in law.
PRACTICAL IMPEDIMENTS
However, what must also be kept in mind is that such an amendment to the PMLA would impose burdensome, costly, and unworkable beneficial ownership reporting requirements on small businesses and their attorneys and raises serious privacy concerns. Millions of small businesses would be required to disclose detailed beneficial ownership information to BCI or the states and then continuously update that information, with harsh civil and criminal penalties for noncompliance.
Many attorneys and law firms that help clients to form companies would be deemed to be applicants or formation agents under the bills and would also be subject to these requirements. BCI or the states would then be required to maintain this information in a database and disclose it to other government agencies and financial institutions on request.
Footnotes
1. https://theprint.in/india/india-plans-to-ask-lawyers-to-report-clients-dubious-transactions-sources/1627575/
3. The FATF Recommendations (2012 - 2023), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (Updated February 2023), FATF, Paris, France, (www.fatf-gafi.org/recommendations.html ) @ Pg. 124
4. Act No. 1 of 1872 titled The Indian Evidence Act, 1872, Section 126;
5. K. C. Sonrexa vs. State of Uttar Pradesh & Ors., 1961 SCC Online All 308 @ Para 19; Dr. B. Ramaswamy vs. R. Paranjothi, 2014 (3) MWN (Cr.) 53 @ Para 9 and 10
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.