XYZ & Associates a leading CS firm in Delhi, specialized in providing professional services, ranging from legal services & management consultancy services. Mr. A, a prominent businessman and lawyer by profession,

CS Professional · Capital Commodity and Money Market · PYQS · December 2020
XYZ & Associates a leading CS firm in Delhi, specialized in providing professional services, ranging from legal services & management consultancy services. Mr. A, a prominent businessman and lawyer by profession, approached XYZ & Associates requesting the incorporation of 4 private limited companies with ₹1,00,000 issued share capital for each company (i.e. total of ₹4,00,000) with the principal activities to invest, on the behalf of prominent investors, in the real estate property of Delhi NCR. XYZ & Associates performed full Know Your Client (KYC) verification of Mr. A, by obtaining all the required identification and economic profile data and also performed a full background check for the said individual as to identify any Politically Exposed Person, sanctions and adverse media positive matches. All the performed procedures did not identify anything suspicious or negative which would prevent the acceptance of Mr. A as client. XYZ & Associates got incorporated all the 4 companies, with Mr. A as the sole Beneficial Shareholder (BO) and immediately funds were deposited in the bank accounts of each of the 4 companies for ₹10,00,00,000 (i.e. total of ₹40,00,00,000). Each of the funds was shown as loans payable, for 1% interest, to a common investor Mr. P from Ghaziabad. The funds were then immediately invested in commercial property in Noida. During a Regulatory monitoring inspection from Directorate of Enforcement, it is identified that Mr. P (the sole investor) is a Politically Exposed Person and has a criminal history and sentences by courts for embezzlement, money laundering, and being involved in a criminal organization. XYZ & Associates is reported in the Disciplinary Committee of ICSI for not performing adequate KYC procedures and also the specific BO (Mr. A) and the sole investor (Mr. P) are reported by ICSI to Directorate of Enforcement. In the light of the above answer the following: What are the red flags were needed to be identified which might indicate money laundering activity in this case? What are the risks and the potential threats that the XYZ & Associates may be faced with in this situation? What steps may the CS firm undertake to mitigate its risks and possible exposure?

Answer & Explanation:

Answer 1(a)(i) The red flags which indicate money laundering in the given case are as under: No economic substance: The business setting of the four companies having only one sole investor (Mr. P) for all four companies and the only return sought, for a total of ₹40,00,00,000 investment, to be 1%, indicates a lack of economic substance. Beneficial owner's profession mismatch: The Beneficial owner (Mr. A) is a prominent lawyer, and the principal activities sought for the four companies, which is to invest in real estate, do not tie directly to his primary profession of being a lawyer. Discrepancy in investment amounts: The Beneficial owner only invested ₹4,00,000 in total across all four companies, while the sole investor invested ₹40,00,00,000 in total across all four companies. This raises a question about who the real Beneficial owner is in all four companies. Risks and threats a CS firm may face in this situation: XYZ & Associates has been reported to the Disciplinary Committee, on the grounds of aiding money laundering due to the insufficient performance of KYC for this specific client, and with the risk of severe disciplinary measures to be decided against the firm. XYZ & Associates has been reported to Directorate of Enforcement, and will be part of an investigation and the possibility of criminal proceedings against them, on the grounds of aiding money laundering due to the insufficient performance of KYC for this specific client. Steps to be taken by CS firm to mitigate its risks and possible exposure: XYZ & Associates should revisit its KYC procedure. XYZ & Associates should fully and openly cooperate, both with ICSI and Directorate of Enforcement accordingly, for the investigation currently in place for Mr. A and Mr. P.

Topics: Prevention of Money Laundering Act, 2002

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