The Auditor Caught Between Two Standards: Reconciling Sections 3 and 12 of the Prevention of Money Laundering Act, 2002

An auditor who agrees to sign an engagement letter on today’s date is fulfilling two responsibilities which were never intended to be merged together. The first of these is of a professional character: it involves maintaining the client’s confidence, examining the client’s books and forming an opinion. The second is a statutory obligation: it requires the auditor to keep an eye on the same client for the state and to submit a report as soon as a transaction seems to be improper. This article argues that the Prevention of Money Laundering Act, 2002 (“PMLA”) has gradually placed Indian auditors, chartered accountants, company secretaries and cost accountants in this difficult position without advising them as to how they should deal with it. Section 3 of the PMLA only imposes penalties for money laundering where the person accused had actual knowledge that the funds in question were tainted. In contrast, Section 12 requires reporting entities, a category which has included these professionals since a 2023 notification, to file a suspicious transaction report based on reasonable suspicion, without having to satisfy any similar standard of knowledge. An auditor, therefore, can easily avoid the consequences of Section 3 with a large margin of safety and yet still be liable to a penalty under Section 13 for the same transaction. By referring to the official interpretation of the PMLA, the 2023 notification that brought these professionals within the scope of reporting entities, the Reserve Bank of India’s KYC/AML framework for banks, the Financial Intelligence Unit’s 2023 guidelines, and the Bombay High Court’s 2025 judgment in Shyam Radhakrishna Malpani v State of Maharashtra, this article shows exactly where these two standards come into conflict. It proposes three practical measures to narrow the gap: red flags specific to audits, similar to those issued by the RBI for banks; a standard form of documentation to record the auditor’s reasons before either deciding to file or refusing to file a report; and good-faith protection from regulatory action under Section 12. None of these suggestions tackles the reasonable-suspicion reporting threshold itself, for which there is a strong justification in keeping it low. What is missing is not a lower standard for reporting; what is missing is an operational floor for the individual professional working under that threshold.