CAM Comment: The article highlights the powers of statutory auditors following the recent judgment, clarifying that statutory auditors cannot be held liable for money laundering solely because of lack of due diligence or negligence. The article also emphasises that criminal liability under PMLA requires clear evidence of collusion and that auditors are not expected to probe beyond their professional auditing role.
Under the Prevention of Money Laundering Act, 2002 (“PMLA”), the offence of money laundering is defined as an attempt to indulge in, knowingly assist, knowingly be a party to, or be actually involved in any activity connected with the proceeds of crime, including its concealment, possession, etc.[1] In 2023,[2] the Central Government expanded the scope of the PMLA by designating Chartered Accountants, Cost Accountants, and Company Secretaries as reporting entities. These entities are now required to conduct enhanced due diligence, among other responsibilities.
The Bombay High Court in Shyam Radhakrishna Malpani v. The State of Maharashtra and Anr.[3] clarified that statutory auditors cannot be held liable for money laundering under Section 3 of the PMLA solely because of the lack of due diligence; direct evidence of their involvement is required to establish liability.
Background of the Case:
Acting on 2015 FIRs by the Anti-Corruption Bureau, the Enforcement Directorate (“ED”) filed a money laundering complaint under Section 3 of the PMLA against Chaggan Bhujbal, his associates, and Shyam Malpani (“Applicant”), a chartered accountant and auditor for Bhujbal’s companies. It alleged that Malpani’s professional negligence enabled money laundering, making him directly liable under Sections 3 and 4 of the PMLA. After the Special Judge rejected his discharge application (the “Impugned Order”), Malpani challenged the decision through a Criminal Revision Application.
Analysis by the Hon’ble Court:
After carefully considering the facts of the case and hearing all the parties, the Hon’ble Court set aside the Impugned Order and held the following:
- As per the complaint filed by the ED, the Applicant was not a beneficiary of the proceeds of crime and that the amount attributed to him under the paragraph tiled “Estimation of PoC” was Nil.
- No evidence suggested that the Applicant/auditor was aware of any fake transactions. Further, the ED also did not implicate the Applicant in the placement or layering of the alleged proceeds of crime.
- The absence of temporal proximity between the auditing period and the alleged generation of proceeds of crime negated any rational connection to money-laundering activities. This gap highlighted the lack of a direct nexus between the Applicant’s/auditor’s actions and that of the predicate offences. Moreover, the Applicant was neither named nor charge-sheeted in the related crimes, reinforcing the absence of any direct or indirect involvement in the purported criminal conduct.
- No substantive material was presented on record to demonstrate that the Applicant had any knowledge of the sham transactions or that he was in any way negligent in the discharge of his duties.
- While discussing the roles and responsibilities of statutory auditors, the Court held that the mere absence of due diligence on their part does not amount to money-laundering under Section 3 of the PMLA. Their role is confined to auditing the financial statements of the company based on the documents and information provided to them within the limited scope of the review.
- It was unreasonable to expect the statutory auditor, merely by virtue of being an auditor, to assume the role of an investigator or to be under any obligation to examine and investigate the genuineness of the documents provided by the companies’ authorised persons. The role of the auditor is inherently distinct from that of the investigating agency.
The Implications and Way Forward
The Shyam Malpani judgment is key in protecting auditors from money-laundering charges when not directly involved. It clarifies that negligence alone does not constitute a crime under anti-money laundering laws and that auditors are not required to investigate beyond their professional scope. Auditors are not enforcement officers under the PMLA, so they are not obligated to verify document authenticity. The ruling prevents excessive prosecution and stresses that criminal liability requires clear evidence of collusion, keeping auditors’ duties limited to lawful auditing.
For further information, please contact:
Sahil Kanuga, Partner, Cyril Amarchand Mangaldas
sahil.kanuga@cyrilshroff.com
[1] Section 3 of Prevention of Money Laundering Act, 2002
[2] Ministry of Finance (Department of Revenue), Notification No. S.O. 2036(E), Gazette of India: Extraordinary, Part II, Section 3(ii), May 3, 2023
[3] Criminal Revision Application No.129 of 2023
