TMI BlogGuidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there underX X X X Extracts X X X X X X X X Extracts X X X X ..... India on July 01, 2005 by the Department of Revenue, Ministry of Finance, Government of India. 2. As per the provisions of the PMLA, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, asset management company, depository participant, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with the securities market and registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI Act)) shall have to adhere to client account opening procedures and maintain records of such transactions as prescribed by the PMLA and rules notified there under. 3. Pursuant to amendments made to the PMLA and Rules thereunder, updated guidelines in the context of recommendations made by Financial Action Task force (FATF) on anti-money laundering standards is enclosed. These guidelines have been divided into two parts; the first part is an overview on the background ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 The Directives as outlined below provide a general background and summary of the main provisions of the applicable anti-money laundering and anti-terrorist financing legislations in India. They also provide guidance on the practical implications of the Prevention of Money Laundering Act, 2002 (PMLA). The Directives also set out the steps that a registered intermediary or its representatives shall implement to discourage and to identify any money laundering or terrorist financing activities. The relevance and usefulness of these Directives will be kept under review and it may be necessary to issue amendments from time to time. 1.1.2 These Directives are intended for use primarily by intermediaries registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI Act). While it is recognized that a one- size-fits-all approach may not be appropriate for the securities industry in India, each registered intermediary shall consider the specific nature of its business, organizational structure, type of clients and transactions, etc. when implementing the suggested measures and procedures to ensure that they are effectively applied. The overriding principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected or related shall also be considered. In case there is a variance in CDD/AML standards prescribed by SEBI and the regulators of the host country, branches/overseas subsidiaries of intermediaries are required to adopt the more stringent requirements of the two. 1.3. Policies and Procedures to Combat Money Laundering and Terrorist financing 1.3.1 Essential Principles: 1.3.1.1 These Directives have taken into account the requirements of the PMLA as applicable to the intermediaries registered under Section 12 of the SEBI Act. The detailed Directives in Section II have outlined relevant measures and procedures to guide the registered intermediaries in preventing ML and TF. Some of these suggested measures and procedures may not be applicable in every circumstance. Each intermediary shall consider carefully the specific nature of its business, organizational structure, type of client and transaction, etc. to satisfy itself that the measures taken by it are adequate and appropriate and follow the spirit of the suggested measures in Section II and the requirements as laid down in the PMLA. 1.3.2 Obligation to establish policies and procedures: 1.3.2.1 Global me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the relevant law enforcement authorities, including the timely disclosure of information; and f) Role of internal audit or compliance function to ensure compliance with the policies, procedures, and controls relating to the prevention of ML and TF, including the testing of the system for detecting suspected money laundering transactions, evaluating and checking the adequacy of exception reports generated on large and/or irregular transactions, the quality of reporting of suspicious transactions and the level of awareness of front line staff, of their responsibilities in this regard. The internal audit function shall be independent, adequately resourced and commensurate with the size of the business and operations, organization structure, number of clients and other such factors Section 2: Detailed Directives 2.1. Written Anti Money Laundering Procedures 2.1.1 Each registered intermediary shall adopt written procedures to implement the anti- money laundering provisions as envisaged under the PMLA. Such procedures shall include inter alia, the following three specific parameters which are related to the overall Client Due Diligence Process : a) Policy for ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, the identity of the natural person exercising control over the juridical person through other means. Explanation: Control through other means can be exercised through voting rights, agreement, arrangements or in any other manner. cc) Where no natural person is identified under clauses (aa) or (bb) above, the identity of the relevant natural person who holds the position of senior managing official. ii. For client which is a trust : Where the client is a trust, the intermediary shall identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the identity of the settler of the trust, the trustee, the protector, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership. iii. Exemption in case of listed companies : Where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a majority-owned subsidiary of such a company, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered office address, correspondence addresses and other addresses if applicable), nature of business activity, trading turnover etc. and manner of making payment for transactions undertaken. The parameters shall enable classification of clients into low, medium and high risk. Clients of special category (as given below) may, if necessary, be classified even higher. Such clients require higher degree of due diligence and regular update of Know Your Client (KYC) profile. c) Documentation requirements and other information to be collected in respect of different classes of clients depending on the perceived risk and having regard to the requirements of Rule 9 of the PML Rules, Directives and Circulars issued by SEBI from time to time. d) Ensure that an account is not opened where the intermediary is unable to apply appropriate CDD measures/ KYC policies. This shall apply in cases where it is not possible to ascertain the identity of the client, or the information provided to the intermediary is suspected to be non - genuine, or there is perceived non - co-operation of the client in providing full and complete information. The market intermediary shall not continue to do busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegory of a particular client. 2.2.3.2 Further, low risk provisions shall not apply when there are suspicions of ML/FT or when other factors give rise to a belief that the customer does not in fact pose a low risk 2.2.3.3 Risk Assessment SEBI Circular No. CIR/ MIRSD/ 1/ 2014 dated March 12, 2014 a) Registered intermediaries shall carry out risk assessment to identify, assess and take effective measures to mitigate its money laundering and terrorist financing risk with respect to its clients, countries or geographical areas, nature and volume of transactions, payment methods used by clients, etc. The risk assessment shall also take into account any country specific information that is circulated by the Government of India and SEBI from time to time, as well as, the updated list of individuals and entities who are subjected to sanction measures as required under the various United Nations' Security Council Resolutions (these can be accessed at the URL - http://www.un.org/sc/committees/1267/aq_sanctions_list.shtml and http://www.un.org/sc/committees/1988/list.shtml) b) The risk assessment carried out shall consider all the relevant risk factors before determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. 2.2.5 Client identification procedure: 2.2.5.1 The KYC policy shall clearly spell out the client identification procedure to be carried out at different stages i.e. while establishing the intermediary client relationship, while carrying out transactions for the client or when the intermediary has doubts regarding the veracity or the adequacy of previously obtained client identification data. Intermediaries shall be in compliance with the following requirements while putting in place a Client Identification Procedure (CIP): a) All registered intermediaries shall proactively put in place appropriate risk management systems to determine whether their client or potential client or the beneficial owner of such client is a politically exposed person. Such procedures shall include seeking relevant information from the client, referring to publicly available information or accessing the commercial electronic databases of PEPS. Further, the enhanced CDD measures as outlined in clause 2.2.5 shall also be applicable where the beneficial owner of a client is a PEP. b) All registered intermediaries are required to obtain senior management approval for establishing bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and verification of records of the identity of the clients of the banking companies, financial institutions and intermediaries of securities market and such other additional requirements that it considers appropriate to enable it to determine the true identity of its clients. 2.2.5.4 It may be noted that irrespective of the amount of investment made by clients, no minimum threshold or exemption is available to registered intermediaries (brokers, depository participants, AMCs etc.) from obtaining the minimum information/documents from clients as stipulated in the PML Rules/ SEBI Circulars (as amended from time to time) regarding the verification of the records of the identity of clients. Further no exemption from carrying out CDD exists in respect of any category of clients. In other words, there shall be no minimum investment threshold/ category-wise exemption available for carrying out CDD measures by registered intermediaries. This shall be strictly implemented by all intermediaries and non-compliance shall attract appropriate sanctions. 2.2.6 Reliance on third party for carrying out Client Due Diligence (CDD) SEBI Circular No. CIR/ MIRSD/ 1/ 2014 dated March 12, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords and information are available on a timely basis to the competent investigating authorities. Where required by the investigating authority, they shall retain certain records, e.g. client identification, account files, and business correspondence, for periods which may exceed those required under the SEBI Act, Rules and Regulations framed there-under PMLA, other relevant legislations, Rules and Regulations or Exchange bye-laws or circulars. 2.3.5 More specifically, all the intermediaries shall put in place a system of maintaining proper record of transactions prescribed under Rule 3 of PML Rules as mentioned below: a) all cash transactions of the value of more than ten lakh rupees or its equivalent in foreign currency; b) all series of cash transactions integrally connected to each other which have been individually valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of ten lakh rupees or its equivalent in foreign currency; c) all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of five years after the business relationship between a client and intermediary has ended or the account has been closed, whichever is later. 2.5.4 In situations where the records relate to on-going investigations or transactions which have been the subject of a suspicious transaction reporting, they shall be retained until it is confirmed that the case has been closed. 2.5.5 Records of information reported to the Director, Financial Intelligence Unit India (FIU IND) SEBI Circular No. CIR/ MIRSD/ 1/ 2014 dated March 12, 2014 : Registered Intermediaries shall maintain and preserve the records of information related to transactions, whether attempted or executed, which are reported to the Director, FIU IND, as required under Rules 7 and 8 of the PML Rules, for a period of five years from the date of the transaction between the client and the intermediary. 2.6. Monitoring of transactions 2.6.1 Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures. This is possible only if the intermediary has an understanding of the normal activity of the client so that it can identify deviations in transactions / activities. 2.6.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeping with clients apparent standing /business activity; c) Clients based in high risk jurisdictions; d) Substantial increases in business without apparent cause; e) Clients transferring large sums of money to or from overseas locations with instructions for payment in cash; f) Attempted transfer of investment proceeds to apparently unrelated third parties; g) Unusual transactions by CSCs and businesses undertaken by offshore banks/financial services, businesses reported to be in the nature of export- import of small items. 2.7.3 Any suspicious transaction shall be immediately notified to the Money Laundering Control Officer or any other designated officer within the intermediary. The notification may be done in the form of a detailed report with specific reference to the clients, transactions and the nature /reason of suspicion. However, it shall be ensured that there is continuity in dealing with the client as normal until told otherwise and the client shall not be told of the report/ suspicion. In exceptional circumstances, consent may not be given to continue to operate the account, and transactions may be suspended, in one or more jurisdictions concerned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, and for coping with terrorist activities was brought into effect through UAPA Amendment Act, 2008. In this regard, the Central Government has issued an Order dated August 27, 2009 detailing the procedure for the implementation of Section 51A of the UAPA. 2.9.2 Under the aforementioned Section, the Central Government is empowered to freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of, or at the direction of the individuals or entities listed in the Schedule to the Order, or any other person engaged in or suspected to be engaged in terrorism. The Government is also further empowered to prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism. 2.9.3 The stock exchanges, depositories and registered intermediaries shall ensure effective and expeditious implementation of the procedure laid down in the UAPA Order dated August 27, 2009 as listed below SEBI Circular No. ISD/ AML/ CIR 2/ 2009 dated October 23, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t jsis@nic.in. v. Stock exchanges, depositories and registered intermediaries shall also file a Suspicious Transaction Report (STR) with FIU-IND covering all transactions in the accounts covered by paragraph 2.9.2 (a) (ii) above carried through or attempted, as per the prescribed format. b) On receipt of the particulars as mentioned in paragraph 2.9.3 (a) (ii) above, IS-I Division of MHA would cause a verification to be conducted by the State Police and /or the Central Agencies so as to ensure that the individuals/ entities identified by the stock exchanges, depositories, registered intermediaries are the ones listed as designated individuals/entities and the funds, financial assets or economic resources or related services, reported by stock exchanges, depositories, registered intermediaries are held by the designated individuals/entities. This verification would be completed within a period not exceeding 5 working days from the date of receipt of such particulars. c) In case, the results of the verification indicate that the properties are owned by or held for the benefit of the designated individuals/entities, an order to freeze these assets under section51A of the UAPA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson or entity is not a designated person i. Any individual or entity, if it has evidence to prove that the freezing of funds, financial assets or economic resources or related services, owned/held by them has been inadvertently frozen, shall move an application giving the requisite evidence, in writing, to the concerned stock exchanges/depositories and registered intermediaries. The stock exchanges/depositories and registered intermediaries shall inform and forward a copy of the application together with full details of the asset frozen given by any individual or entity informing of the funds, financial assets or economic resources or related services have been frozen inadvertently, to the nodal officer of IS-I Division of MHA as per the contact details given in paragraph 5(ii) above within two working days. The Joint Secretary (IS-I), MHA, being the nodal officer for (IS-I) Division of MHA, shall cause such verification as may be required on the basis of the evidence furnished by the individual/entity and if he is satisfied, he shall pass an order, within fifteen working days, unfreezing the funds, financial assets or economic resources or related services, owned/held by such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts (NTRs) for each month shall be submitted to FIU-IND by 15th of the succeeding month. d) The Principal Officer will be responsible for timely submission of CTR, STR and NTR to FIU-IND; e) Utmost confidentiality shall be maintained in filing of CTR, STR and NTR to FIU-IND. f) No nil reporting needs to be made to FIU-IND in case there are no cash/ suspicious/ non profit organization transactions to be reported. 2.10.3 Intermediaries shall not put any restrictions on operations in the accounts where an STR has been made. Intermediaries and their directors, officers and employees (permanent and temporary) shall be prohibited from disclosing ( tipping off ) the fact that a STR or related information is being reported or provided to the FIU-IND. This prohibition on tipping off extends not only to the filing of the STR and/ or related information but even before, during and after the submission of an STR. Thus, it shall be ensured that there is no tipping off to the client at any level It is clarified that the registered intermediaries, irrespective of the amount of transaction and/or the threshold limit envisaged for predicate offences specified in part B of Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In terms of Section 13 (2) of the PMLA, the Director, FIU IND can take appropriate action, including levying monetary penalty, on the Designated Director for failure of the intermediary to comply with any of its AML/CFT obligations. 2.11.2.3 Registered intermediaries shall communicate the details of the Designated Director, such as, name designation and address to the Office of the Director, FIU IND. 2.12. Employees Hiring/Employee s Training/ Investor Education 2.12.1 Hiring of Employees 2.12.1.1 The registered intermediaries shall have adequate screening procedures in place to ensure high standards when hiring employees. They shall identify the key positions within their own organization structures having regard to the risk of money laundering and terrorist financing and the size of their business and ensure the employees taking up such key positions are suitable and competent to perform their duties. 2.12.2 Employees Training: 2.12.2.1 Intermediaries must have an ongoing employee training programme so that the members of the staff are adequately trained in AML and CFT procedures. Training requirements shall have specific focuses for frontline staff, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. SEBI/ HO/ IMD / DF3/ CIR/ P / 2016/ 84 September 14, 2016 Master Circular for Mutual Funds Compliance with AML/ CFT CDD directives of SEBI stipulated in Master Circular dated September 14, 2016 6. CIR/ MIRSD/ 66/ 2016 July 21, 2016 Operationalization of Central KYC Records Registry (CKYCR) Authorization of Central Registry of Securitization and Asset Reconstruction and Security interest of India (CERSAI) for receiving, storing, safeguarding, retrieving the KYC records and finalizing template of KYC 7. CIR/ IMD/ FPI C/ 59/ 2016 June 10, 2016 Know Your Client (KYC)norms for ODI subscribers, transferability of ODIs, reporting of suspicious transactions, periodic review of systems and modified ODI reporting format Applicability of Indian KYC/AML norms for Client Due Diligence, KYC Review, Suspicious Transactions Report, Reporting of complete transfer trail of ODIs, Reconfirmation of ODI positions, Periodic Operational Evaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. CIR /MIRSD/ 4 /2013 March 28, 2013 Amendment to SEBI {(Know Your Client) Modification of circulars dated December 23, 2011 Registration Agency} Regulations, 2011 and relevant circulars and April 13, 2012, to the extent of requirement for sending original KYC documents of the clients to the KRA 15. CIR/ MIRSD/ 2/ 2013 January 24, 2013 Guidelines on Identification of Beneficial Ownership Client Due Diligence to identify and verify the identity of persons who beneficially own or control the securities account for clients other than individuals or trusts and client which is a trust. Exemption in case of listed companies, Applicability for foreign investors and Implementation 16. CIR/ MIRSD/ 01 /2013 January 04, 2013 Rationalization process for obtaining PAN by Investors Verification the PAN of clients online at the Income Tax website 17. CIR/ MIRSD/ 11/ 2012 September 5, 2012 Know You ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gust 22, 2011 Simplification and Rationalization of Trading Account Opening Process Client account opening Process, Client Account Opening Form, Rights Obligations of stock broker, sub-broker and client for trading on exchanges Uniform Risk Disclosure Documents, Guidance Note detailing Do s and Don ts for trading 25. CIR/ ISD/ AML/ 3/ 2010 December 31, 2010 Master Circular on AML/CFT Anti - Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) / Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under 26. CIR/ MRD/ DP / 37/ 2010 December 14, 2010 Acceptance of third party address as correspondence address Capturing of address other than that of the BO as the correspondence address. 27. CIR/ MRD/ DMS/ 13/ 2010 August 31, 2010 Guidelines on the Execution of Power of Attorney by the Client in favour of Stock Broker/ DP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock-brokers Responsibility of stock brokers to ensure in - person verification by its own staff. 36. MRD/ DoP/ Cir-20/ 2008 June 30, 2008 Mandatory Requirement of PAN Exception for certain classes of persons from PAN being the sole identification number for all participants trading in the securities market. 37. F.No.47/ 2006/ ISD/ SR/ 122539 April 4, 2008 In-person verification of BO s when opening demat accounts In-person verification to be carried out by staff of depository participant. 38. MRD/ DoP/ Cir- 20/ 2008 April 3, 2008 Exemption from mandatory requirement of PAN. Exemption for investors residing in the State of Sikkim from PAN being the sole identification number for trading in the securities market. 39. F.No.47- 2006 /ISD/ SR/ 118153/ 2008 February 22, 2008 In-Person verification of clients by depositories Clarification on variou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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