BACKGROUND:
The Government has introduced amendments in Prevention of Money Laundering Act, 2002(PMLA) through Finance Act, 2018. The amendments aim at further enhancing the effectiveness of the Act, widen its scope and take care of certain difficulties faced by the Enforcement Directorate in the prosecution of PMLA cases. The major amendment proposed inter-alia is including Corporate Frauds as Scheduled Offences. Section 205(h) of the Finance Act proposes to insert a new paragraph 29 in Part A of the Schedule describing offences under the Companies Act. This para indicates the offences under Section 447 of the Companies Act which provides punishment for fraud. Hence, with this amendment Section 447 of the Companies Act, 2013 is being included as scheduled offences under the PMLA provisions. As per the Ministry, this amendment aims to strengthen the PMLA with respect to corporate frauds.
EFFECTIVE DATE OF AMENDMENT:
The Ministry of Finance has vide its notification in Official Gazette on 02/04/2018 appointed 01/04/2018 as the date on which Section 205 of the Finance Act dealing with amendment in Prevention of Corruption Act, 2002 shall come into force. Hence, Corporate Frauds under Section 447 of the Companies Act, 2013 have been included in the Scheduled List of Offences under PMLA with effect from 01/04/2018.
AMENDMENT TO PMLA TO DETECT CORPORATE FRAUD
Prevention of Money Laundering Act, 2002 is an Act of the Parliament of India to prevent money-laundering and to provide for confiscation of property derived from money-laundering.
Through the Finance Bill, 2018, the government amended the Prevention of Money Laundering Act, 2002 (PMLA). The handling of proceeds from corporate frauds will now be a money- laundering offence. As the PMLA gives ED the power to attach and confiscate property determined to be proceeds of crime, the amendment will help authorities to prevent the dissipation of proceeds from corporate frauds. However, the unintended repercussion of the amendment will be innocent parties being questioned about their dealings with a company where fraud is discovered and potentially having their personal assets seized or directors arrested.
Therefore, it is critical for directors and officials of companies to now maintain high vigil. Relationships with banks are typically promoter-driven and Non-executive directors, foreign investors or joint venture partners do not play a role in this. However, this does not imply that they would be insulated from liability. The question that arises is, when can directors and other officials of the company be held vicariously liable for the actions of the company?
Under the Companies Act, an exception has been specifically carved out for independent and non-executive directors, ensuring that they are liable only in cases where their knowledge and involvement can be established or where they, despite having the knowledge, failed to act diligently. However, such exceptions are generally not prevalent in other statutes like the PMLA. Given that non-executive directors are usually not involved in day to day affairs of the company, they should normally not be liable for actions which are largely promoter-driven. However, such non-executive directors often find themselves explaining to the authorities that they were not involved or that they had acted diligently. Once a fraud is discovered, authorities generally look at everyone with suspicion, and merely being a non-executive director does not shield the individual from liability or criminal prosecution.
Thus, ensuring that appropriate measures are in place to shield against any criminal investigation, prosecution and its effects are critical. Having such measures in place also enables individuals to be viewed as cooperative in the investigative exercise.
Not only does this change bring the risk of imprisonment, it has reputational consequences. It is thus imperative that the directors take the necessary steps to avoid liability. It has been observed that the corporate world has not yet reacted on this development in PMLA, perhaps they have not yet observed this because this new amendment is part of finance bill. Therefore, regulators should seek and consider the views of stakeholders on this significant change having a huge impact on the corporate world and provide justifiable carve-outs in genuine instances.
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