Master Circular on AML/CFT - SEBI - CIR/ISD/AML/3/2010

OFFICER ON SPECIAL DUTY INTEGRATED SURVEILLANCE DEPARTMENT EMAIL [email protected] Tel : 022 26449450 Fax : 022 2644902 CIR/ISD/AML/3/2010 December 31, 2010 To all Intermediaries registered with SEBI under Section 12 of the SEBI Act. (Through the stock exchanges for stock brokers and sub brokers, depositories for depository participants, AMFI for Asset Management Companies.) Sub: 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. Dear Sir / Madam, 1. The Prevention of Money Laundering Act, 2002 (PMLA) was brought into force with effect from 1 st July 2005. Necessary Notifications / Rules under the said Act were published in the Gazette of India on July 01, 2005. As per the provisions of the PMLA, intermediary (includes a stockbroker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, asset management company, depositary 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 2. SEBI has issued necessary directives vide circulars, from time to time, covering issues related to Know Your Client (KYC) norms, Anti- Money Laundering (AML), Client Due Diligence (CDD) and Combating Financing of Terrorism (CFT). The directives lay down the minimum requirements and it is emphasized that the intermediaries may, according to their requirements, specify additional disclosures to be made by clients to address concerns of money laundering and suspicious transactions undertaken by clients. Reference to applicable statutes and reporting guidelines for intermediaries is available at the website of the Financial Intelligence Unit India (FIU-IND). Directives to all intermediaries under Section 12 of the SEBI Act are also issued in the context of compliance with the standards set by the Financial Action Task Force (FATF) on AML and CFT. 3. List of key circulars/directives issued with regard to KYC, CDD, AML and CFT Following is a list of key circulars on KYC/CDD/AML/CFT issued by SEBI from 1993: Circular Number Date of circular Subject Broad area Covered 1 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. 2 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 Clarifications on the Execution of the POA by the client 3 CIR/MRD/DMS/13/2010 April 23,2010 Guidelines on the Execution of Power of Attorney by the Client in favour of Stock Broker/ DP Guidelines on the Execution of Power of Attorney by the Client 4 CIR/MRD/DP/11/2010 April 06,2010 Master Circulars for Depositories Opening of BO Accounts 5 CIR/ISD/AML/2/2010 June 14,2010 Additional Requirements for AML/CFT Additional Requirements on retention of documents, monitoring, tipping off, updation of records and other clarifications. 6 CIR/ISD/AML/1/2010 February 12,2010 Master Circular AML/CFT Framework for AML/ CFT including procedures for CDD, client identification, record keeping retention, monitoring and reporting of STRs 7 SEBI/MIRSD/Cir No.02/2010 January 18,2010 Mandatory Requirement of in-person verification of clients. In-person verification done for opening beneficial owner s account by a DP will hold good for opening trading account for a stock broker and vice versa, if the DP and the stock broker is the same entity or if one of them is the holding or subsidiary. 8 SEBI / IMD / MC f h h No.1 /189241/ 2010 January 01,2010 Master Circular for Mutual Funds Compliance with AML/CFT CDD directives of SEBI stipulated in Master Circular dated December 19, 2008 9 ISD/AML/CIR-2/2009 October 23,2009 Directives on CFT under Unlawful Activities (Prevention) Act, 1967 Procedure to be followed for the freezing of assets of individual or entities engaged in terrorism 10 ISD/AML/CIR-1/2009 September 01, 2009 Additional AML/ CFT obligations of Intermediaries under PMLA, 2002 and rules framed Additional AML/CFT requirements and clarifications thereon 11 ISD/AML/CIR-1/2008 December 19, 2008 Master Circular on AML/CFT directives Framework for AML/CFT including procedures for CDD, client identification, record keeping retention, monitoring and reporting of 12 MIRSD/DPSIII/130466/2008 July 2,2008 In-Person verification of clients by stock-brokers Responsibility of stockbrokers to ensure in-person verification by its own staff. 13 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. 14 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. 15 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. 16 F.No.47-2006/ISD/SR/11815 3/2008 February 22, 2008 In-Person verification of clients by depositories clarification on various topics relating to in-person verification of BOs at the time of opening demat accounts 17 MRD/DoP/Dep/Cir-12/2007 September 7, 2007 KYC Norms for Depositories Proof of Identity (POI) And Proof of Address (POA) for opening a Beneficiary Owner (BO) Account for 18 MRD/DoP/Cir-05/2007 April 27,2007 PAN to be the sole identification number for all transactions in the securities market Mandatory requirement of PAN for participants transacting in the securities market. 18 ISD/CIR/RR/AML/2/06 March 20,2006 PMLA-Obligations Of intermediaries in terms of Rules notified there under Procedure for maintaining and preserving records, reporting requirements and formats of reporting cash transactions and suspicious transactions 20 ISD/CIR/RR/AML/1/06 January 18,2006 Directives on AML Standards Framework for AML And CFT including policies and procedures, Client Due Diligence requirements, record keeping, retention, monitoring and reporting 21 SEBI/MIRSD/DPS-1/Cir-31/2004 August 26,2004 Uniform Documentary Requirements for trading Uniform KYC Documentary requirements for trading on different segments and exchanges 22 MRD/DoP/Dep/Cir-29/2004 August 24,2004 Proof of Identity (POI) and Proof of Address (POA) for opening a Beneficiary Owner Broadening the list of documents that may be accepted as Proof of Identity (POI) and/or Proof of Address (POA) for the 23 SEBI/MRD/SE/Cir-33/2003/27/08 August 27,2003 Mode of payment and delivery Prohibition on acceptance/giving of cash by brokers and on third party transfer of securities 24 SMDRP/Policy/Cir-36/2000 August 4,2000 KYC Norms for Depositories Documentary requirements for opening a beneficiary account. 25 SMD/POLICY/CIRCULARS/5-97 April 11,1997 Client Registration Form Formats of client Registration Form and broker clients agreements 26 SMD-1/23341 Nov. 18,1993 Regulation of transaction between clients and members Mandatory requirement to obtain details of clients by brokers. 4 . This Master circular consolidates all the requirements/instructions issued by SEBI with regard to AML/CFT till January 31 2010 and supersedes the earlier circulars, dated September 01, 2009, December 19, 2008, March 20, 2006 and January 18, 2006 referenced at S.Nos. (10, 11, 19 and 20) respectively of the abovementioned table. This Master Circular is divided into two parts; the first part is an overview on the background and essential principles that concern combating money laundering (ML) and terrorist financing (TF). The second part provides a detailed account of the procedures and obligations to be followed by all registered intermediaries to ensure compliance with AML/CFT directives This Circular is being issued to all the intermediaries as specified at Para 2 above. The circular shall also apply to their branches and subsidiaries located abroad, especially, in countries which do not or insufficiently apply the FATF Recommendations, to the extent local laws and regulations permit. When local applicable laws and regulations prohibit implementation of these requirements, the same shall be brought to the notice of SEBI. 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. 5. This Master circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 (SEBI Act), and Rule 7 and Rule 9 of Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (PML Rules) to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. 6. All the registered intermediaries are directed to ensure compliance with the requirements contained in this Master Circular on an immediate basis. Stock exchanges, Depositories and AMFI are also directed to bring the contents of this circular to the attention of their members/ depository participants and verify compliance during inspections. Yours faithfully, S. Ramann SEBI Master Circular on Anti Money Laundering (AML and Combating Financing of Terrorism (CFT)- Obligations of Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules Framed there-under (Consolidated upto December 31, 2010) PART - I OVERVIEW 1 Introduction 2 Back ground 3 Policies and Procedures to Combat Money Laundering and Terrorist financing 3.1 Essential Principles 3.2 Obligations to establish policies and procedures PART - II DETAILED OBLIGATIONS 4 Written Anti Money Laundering Procedures 5 Client Due Diligence 5.1 Elements of Client Due Diligence 5.2 Policy for acceptance of clients 5.3 Risk Based Approach 5.4 Clients of special category (CSC) 5.5 Client identification procedure 6 Record Keeping 7 Information to be maintained 8 Retention of Records 9 Monitoring of transactions 10 Suspicious Transaction Monitoring Reporting 11 List of Designated Individuals/Entities 12 Procedure for freezing of funds, financial assets or economic resources or related services 13 Reports to Financial Intelligence Unit- India 14 Designation of an officer for reporting of suspicious transaction 15 Employees Hiring/Training and Investor Education 16 Annexure- List of various Reports and their formats. PART I OVERVIEW 1. Introduction 1.1 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. 1.2 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- sizefits- 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 is that they shall be able to satisfy themselves that the measures taken by them are adequate, appropriate and abide by the spirit of such measures and the requirements as enshrined in the PMLA. 2. Back Ground The PMLA came into effect from 1st July 2005. Necessary Notifications / Rules under the said Act were published in the Gazette of India on 1st July, 2005 by the Department of Revenue, Ministry of Finance, Government of India. The PMLA has been further amended vide notification dated March 6, 2009 and inter alia provides that violating the prohibitions on manipulative and deceptive devices, insider trading and substantial acquisition of securities or control as prescribed in Section 12 A read with Section 24 of the Securities and Exchange Board of India Act, 1992 (SEBI Act) will now be treated as a scheduled offence under schedule B of the PMLA. 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 (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under Section 12 of the SEBI Act , shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include: All cash transactions of the value of more than ₹ 10 lakh or its equivalent in foreign currency. All series of cash transactions integrally connected to each other which have been valued below ₹ 10 lakh or its equivalent in foreign currency where such series of transactions take place within one calendar month. All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as demat account, security account maintained by the registered intermediary. It may, however, be clarified that for the purpose of suspicious transactions reporting, apart from transactions integrally connected , transactions remotely 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. 3. Policies and Procedures to Combat Money Laundering and Terrorist financing 3.1 Essential Principles 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 Part 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 Part II and the requirements as laid down in the PMLA. 3.2 Obligation to establish policies and procedures 3.2.1 Global measures taken to combat drug trafficking, terrorism and other organized and serious crimes have all emphasized the need for financial institutions, including securities market intermediaries, to establish internal procedures that effectively serve to prevent and impede money laundering and terrorist financing. The PMLA is in line with these measures and mandates that all intermediaries ensure the fulfillment of the aforementioned obligations. 3.2.2 To be in compliance with these obligations, the senior management of a registered intermediary shall be fully committed to establishing appropriate policies and procedures for the prevention of ML and TF and ensuring their effectiveness and compliance with all relevant legal and regulatory requirements. The Registered Intermediaries shall: (a) issue a statement of policies and procedures, on a group basis where applicable, for dealing with ML and TF reflecting the current statutory and regulatory requirements; (b) ensure that the content of these Directives are understood by all staff members; (c) regularly review the policies and procedures on the prevention of ML and TF to ensure their effectiveness. Further, in order to ensure the effectiveness of policies and procedures, the person doing such a review shall be different from the one who has framed such policies and procedures; (d) adopt client acceptance policies and procedures which are sensitive to the risk of ML and TF; (e) undertake client due diligence ( CDD ) measures to an 15 | P a g e extent that is sensitive to the risk of ML and TF depending on the type of client, business relationship or transaction; (f) have a system in place for identifying, monitoring and reporting suspected ML or TF transactions to the law enforcement authorities; and (g) develop staff members awareness and vigilance to guard against ML and TF 3.2.3 Policies and procedures to combat ML shall cover: a. Communication of group policies relating to prevention of ML and TF to all management and relevant staff that handle account information, securities transactions, money and client records etc. whether in branches, departments or subsidiaries; b. Client acceptance policy and client due diligence measures, including requirements for proper identification; c. Maintenance of records; d.Compliance with relevant statutory and regulatory requirements; e. Co-operation 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. PART - II DETAILED DIRECTIVES 4. Written Anti Money Laundering Procedures 4.1 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 acceptance of clients b. Procedure for identifying the clients c. Transaction monitoring and reporting especially Suspicious Transactions Reporting (STR). 5. Client Due Diligence 5.1 The CDD measures comprise the following: (a) Obtaining sufficient information in order to identify persons who beneficially own or control the securities account. Whenever it is apparent that the securities acquired or maintained through an account are beneficially owned by a party other than the client, that party shall be identified using client identification and verification procedures. The beneficial owner is the natural person or persons who ultimately own, control or influence a client and/or persons onwhose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement. (b) Verify the client s identity using reliable, independent source documents, data or information; (c) Identify beneficial ownership and control, i.e. determine which individual(s) ultimately own(s) or control(s) the client and/or the person on whose behalf a transaction is being conducted; (d) Verify the identity of the beneficial owner of the client and/or the person on whose behalf a transaction is being conducted, corroborating the information provided in relation to (c); (e) Understand the ownership and control structure of the client; (f) Conduct ongoing due diligence and scrutiny, i.e. Perform ongoing scrutiny of the transactions and account throughout the course of the business relationship to ensure that the transactions being conducted are consistent with the registered intermediary s knowledge of the client, its business and risk profile, taking into account, where necessary, the client s source of funds; and (g) Registered intermediaries shall periodically update all documents, data or information of all clients and beneficial owners collected under the CDD process. 5.2 Policy for acceptance of clients: 5.2.1 All registered intermediaries shall develop client acceptance policies and procedures that aim to identify the types of clients that are likely to pose a higher than average risk of ML or TF. By establishing such policies and procedures, they will be in a better position to apply client due diligence on a risk sensitive basis depending on the type of client business relationship or transaction. In a nutshell, the following safeguards are to be followed while accepting the clients: a) No account is opened in a fictitious / benami name or on an anonymous basis. b) Factors of risk perception (in terms of monitoring suspicious transactions) of the client are clearly defined having regard to clients location (registered office address, correspondence addresses and other addresses i f applicable), n a tur e of bus ine s s a c t ivi ty, 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 cl i e n t s require h i g h e r degree o f 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 applicable 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 business with such a person and file a suspicious activity report. It shall also evaluate whether there is suspicious trading in determining whether to freeze or close the account. The market intermediary shall be cautious to ensure that it does not return securities of money that may be from suspicious trades. However, the market intermediary shall consult the relevant authorities in determining what action it shall take when it suspects suspicious trading. e) The circumstances under which the client is permitted to act on behalf of another person / entity shall be clearly laid down. It shall be specified in what manner the account shall be operated, transaction limits for the operation, additional authority required for transactions exceeding a specified quantity/value and other appropriate details. Further the rights and responsibilities of both the persons i.e. the agent- client registered with the intermediary, as well as the person on whose behalf the agent is acting shall be clearly laid down. Adequate verification of a person s authority to act on behalf of the client shall also be carried out. f) Necessary checks and balance to be put into place before opening an account so as to ensure that the identity of the client does not match with any person having known criminal background or is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide. (g) The CDD process shall necessarily be revisited when there are suspicions of money laundering or financing of terrorism (ML/FT). 5.3 Risk-based Approach 5.3.1 It is generally recognized that certain clients may be of a higher or lower risk category depending on the circumstances such as the client s background, type of business relationship or transaction etc. As such, the registered intermediaries shall apply each of the client due diligence measures on a risk sensitive basis. The basic principle enshrined in this approach is that the registered intermediaries shall adopt an enhanced client due diligence process for higher risk categories of clients. Conversely, a simplified client due diligence process may be adopted for lower risk categories of clients. In line with the risk-based approach, the type and amount of identification information and documents that registered intermediaries shall obtain necessarily depend on the risk category of a particular client. 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. 5.4 Clients of special category (CSC): Such clients include the following i. Non resident clients ii. High net-worth clients, iii. Trust, Charities, Non-Governmental Organizations (NGOs) and organizations receiving donations iv. Companies having close family shareholdings or beneficial ownership v. Politically Exposed Persons (PEP) are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. The additional norms applicable to PEP as contained in the subsequent para 5.5 of this circular shall also be applied to the accounts of the family members or close relatives of PEPs. vi. Companies offering foreign exchange offerings vii. Clients in high risk countries where existence / effectiveness of money laundering controls is suspect, where there is unusual banking secrecy, countries active in narcotics production, countries where corruption (as per Transparency International Corruption Perception Index) is highly prevalent, countries against which government sanctions are applied, countries reputed to be any of the following Havens/ sponsors of international terrorism, offshore financial centers, tax havens, countries where fraud is highly prevalent. While dealing with clients in high risk countries where the existence/effectiveness of money laundering control is suspect, intermediaries apart from being guided by the Financial Action Task Force (FATF) statements that identify countries that do not or insufficiently apply the FATF Recommendations, published by the FATF on its website (www.fatf- gafi.org), shall also independently access and consider other publicly available information. viii. Non face to face clients ix. Clients with dubious reputation as per public information available etc. The above mentioned list is only illustrative and the intermediary shall exercise independent judgment to ascertain whether any other set of clients shall be classified as CSC or not. 5.5 Client identification procedure: 5.5 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 5.5 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 business relationships with PEPs. Where a client has been accepted and the client or beneficial owner is subsequently found to be, or subsequently becomes a PEP, registered intermediaries shall obtain senior management approval to continue the business relationship. c) Registered intermediaries shall also take reasonable measures to verify the sources of funds as well as the wealth of clients and beneficial owners identified as PEP . d) The client shall be identified by the intermediary by using reliable sources including documents / information. The intermediary shall obtain adequate information to satisfactorily establish the identity of each new client and the purpose of the intended nature of the relationship. e) The information must be adequate enough to satisfy competent authorities (regulatory / enforcement authorities) in future that due diligence was observed by the intermediary in compliance with the directives. Each original document shall be seen prior to acceptance of a copy. f) Failure by prospective client to provide satisfactory evidence of identity shall be noted and reported to the higher authority within the intermediary 5.5.1 SEBI has prescribed the minimum requirements relating to KYC for certain classes of registered intermediaries from time to time as detailed in the table. Taking into account the basic principles enshrined in the KYC norms which have already been prescribed or which may be prescribed by SEBI from time to time, all registered intermediaries shall frame their own internal directives based on their experience in dealing with their clients and legal requirements as per the established practices. Further, the intermediary shall conduct ongoing due diligence where it notices inconsistencies in the information provided. The underlying objective shall be to follow the requirements enshrined in the PMLA, SEBI Act and Regulations, directives and circulars issued thereunder so that the intermediary is aware of the clients on whose behalf it is dealing. 5.5.2 Every intermediary shall formulate and implement a CIP which shall incorporate the requirements of the PML Rules Notification No. 9/2005 dated July 01, 2005 (as amended from time to time), which notifies rules for maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information 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. PML Rules have recently been amended vide notification No. 13/2009 dated November 12, 2009 and need to be adhered to by registered intermediaries. 5.3 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. 6. Record Keeping 6.1 Registered intermediaries shall ensure compliance with the record keeping requirements contained in the SEBI Act, 1992, Rules and Regulations made there-under, PMLA as well as other relevant legislation, Rules, Regulations, Exchange Bye-laws and Circulars. 6.2 Registered Intermediaries shall maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for prosecution of criminal behavior. 6.3 Shall there be any suspected drug related or other laundered money or terrorist property, the competent investigating authorities would need to trace through the audit trail for reconstructing a financial profile of the suspect account. To enable this reconstruction, registered intermediaries shall retain the following information for the accounts of their clients in order to maintain a satisfactory audit trail: (a) the beneficial owner of the account; (b) the volume of the funds flowing through the account; and (c) for selected transactions: the origin of the funds; the form in which the funds were offered or withdrawn, e.g. cheques, demand drafts etc. the identity of the person undertaking the transaction; the destination of the funds; the form of instruction and authority. 6.4 Registered Intermediaries shall ensure that all client and transaction records 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. 6.5 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: (i) all cash transactions of the value of more than rupees ten lakh or its equivalent in foreign currency; (ii) all series of cash transactions integrally connected to each other which have been valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds rupees ten lakh; (iii) all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place; (iv) all suspicious transactions whether or not made in cash and by way of as mentioned in the Rules. 7. Information to be maintained Intermediaries are required to maintain and preserve the following information in respect of transactions referred to in Rule 3 of PML Rules: I. the nature of the transactions; II. the amount of the transaction and the currency in which it is denominated; III. the date on which the transaction was conducted; and IV. the parties to the transaction. 8. Retention of Records 8.1 Intermediaries shall take appropriate steps to evolve an internal mechanism for proper maintenance and preservation of such records and information in a manner that allows easy and quick retrieval of data as and when requested by the competent authorities. Further, the records mentioned in Rule 3 of PML Rules have to be maintained and preserved for a period of ten years from the date of transactions between the client and intermediary. 8.2 As stated in sub-section 5.5, intermediaries are required to formulate and implement the CIP containing the requirements as laid down in Rule 9 of the PML Rules and such other additional requirements that it considers appropriate. The records of the identity of clients have to be maintained and preserved for a period of ten years from the date of cessation of transactions between the client and intermediary, i.e. the date of termination of an account or business relationship between the client and intermediary 8.3 Thus the following document retention terms shall be observed: (a) All necessary records on transactions, both domestic and international, shall be maintained at least for the minimum period prescribed under the relevant Act and Rules (PMLA and rules framed thereunder as well SEBI Act) and other legislations, Regulations or exchange bye-laws or circulars. (b) Records on client identification (e.g. copies or records of official identification documents like passports, identity cards, driving licenses or similar documents), account files and business correspondence shall also be kept for the same period. 8.4 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. 9. Monitoring of transactions 9.1 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. 9.2 The intermediary shall pay special attention to all complex, unusually large transactions / patterns which appear to have no economic purpose. The intermediary may specify internal threshold limits for each class of client accounts and pay special attention to transactions which exceeds these limits. The background including all documents/office records /memorandums/clarifications sought pertaining to such transactions and purpose thereof shall also be examined carefully and findings shall be recorded in writing. Further such findings, records and related documents shall be made available to auditors and also to SEBI/stock exchanges/FIUIND/ other relevant Authorities, during audit, inspection or as and when required. These records are required to be preserved for ten years as is required under the PMLA. 9.3 The intermediary shall ensure a record of the transactions is preserved and maintained in terms of Section 12 of the PMLA and that transactions of a suspicious nature or any other transactions notified under Section 12 of the Act are reported to the Director,FIU-IND. Suspicious transactions shall also be regularly reported to the higher authorities within the intermediary. 9.4 Further, the compliance cell of the intermediary shall randomly examine a selection of transactions undertaken by clients to comment on their nature i.e. whether they are in the nature of suspicious transactions or not. 10. Suspicious Transaction Monitoring Reporting 10.1 Intermediaries shall ensure that appropriate steps are taken to enable suspicious transactions to be recognized and have appropriate procedures for reporting suspicious transactions. While determining suspicious transactions, intermediaries shall be guided by the definition of a suspicious transaction contained in PML Rules as amended from time to time. 10.2 A list of circumstances which may be in the nature of suspicious transactions is given below. This list is only illustrative and whether a particular transaction is suspicious or not will depend upon the background, details of the transactions and other facts and circumstances: a) Clients whose identity verification seems difficult or clients that appear not to cooperate b) Asset management services for clients where the source of the funds is not clear or not in keeping 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. 10.3 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 the transaction, or other action taken. The Principal Officer/Money Laundering Control Officer and other appropriate compliance, risk management and related staff members shall have timely access to client identification data and CDD information, transaction records and other relevant information. 10.4 It is likely that in some cases transactions are abandoned or aborted by clients on being asked to give some details or to provide documents. It is clarified that intermediaries shall report all such attempted transactions in STRs, even if not completed by clients, irrespective of the amount of the transaction. 10.5 Clause 5.4(vii) of this Master Circular categorizes clients of high risk countries, including countries where existence and effectiveness of money laundering controls is suspect or which do not or insufficiently apply FATF standards, as CSC . Intermediaries are directed that such clients shall also be subject to appropriate counter measures. These measures may include a further enhanced scrutiny of transactions, enhanced relevant reporting mechanisms or systematic reporting of financial transactions, and applying enhanced due diligence while expanding business relationships with the identified country or persons in that country etc. 11. List of Designated Individuals/Entities An updated list of individuals and entities which are subject to various sanction measures such as freezing of assets/accounts, denial of financial services etc., as approved by the Security Council Committee established pursuant to various United Nations' Security Council Resolutions (UNSCRs) can be accessed at its website at http://www.un.org/sc/committees/1267/consolist.shtml. Registered intermediaries are directed to ensure that accounts are not opened in the name of anyone whose name appears in said list. Registered intermediaries shall continuously scan all existing accounts to ensure that no account is held by or linked to any of the entities or individuals included in the list. Full details of accounts bearing resemblance with any of the individuals/entities in the list shall immediately be intimated to SEBI and FIU-IND. 12. Procedure for freezing of funds, financial assets or economic resources or related services Section 51A, of the Unlawful Activities (Prevention) Act, 1967 (UAPA), relating to the purpose of prevention of, 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. 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. The obligations to be followed by intermediaries to ensure the effective and expeditious implementation of said Order has been issued vide SEBI Circular ref. no: ISD/AML/CIR-2/2009 dated October 23, 2009, which needs to be complied with scrupulously. 13. Reporting to Financial Intelligence Unit-India 13.1 In terms of the PML Rules, intermediaries are required to reportinformation relating to cash and suspicious transactions to the Director, Financial Intelligence Unit-India (FIU-IND) at the following address: Director, FIU-IND, Financial Intelligence Unit-India, 6th Floor, Hotel Samrat, Chanakyapuri, New Delhi-110021. Website: http://fiuindia.gov.in 13.2 Intermediaries shall carefully go through all the reporting requirements and formats enclosed with this circular. These requirements and formats are divided into two parts- Manual Formats and Electronic Formats. Details of these formats are given in the documents (Cash Transaction Report- version 1.0 and Suspicious Transactions Report version 1.0) which are also enclosed with this circular. These documents contain detailed directives on the compilation and manner/procedure of submission of the manual/electronic reports to FIU-IND. The related hardware and technical requirement for preparing reports in manual/electronic format, the related data files and data structures thereof are also detailed in these documents. Intermediaries, which are not in a position to immediately file electronic reports, may file manual reports with FIU-IND as per the formats prescribed. While detailed instructions for filing all types of reports are given in the instructions part of the related formats, intermediaries shall adhere to the following: (a) The Cash Transaction Report (CTR) (wherever applicable) for each month shall be submitted to FIU-IND by 15th of the succeeding month. (b) The Suspicious Transaction Report (STR) shall be submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature. The Principal Officer shall record his reasons for treating any transaction or a series of transactions as suspicious. It shall be ensured that there is no undue delay in arriving at such a conclusion. (c) The Principal Officer will be responsible for timely submission of CTR and STR to FIU-IND; (d) Utmost confidentiality shall be maintained in filing of CTR and STR to FIU-IND. The reports may be transmitted by speed/registered post/fax at the notified address. (e) No nil reporting needs to be made to FIU-IND in case there are no cash/suspicious transactions to be reported. 13.3 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 of PMLA, 2002, shall file STR if they have reasonable grounds to believe that the transactions involve proceeds of crime. 14. Designation of an officer for reporting of suspicious transactions 14.1 To ensure that the registered intermediaries properly discharge their legal obligations to report suspicious transactions to the authorities, the Principal Officer would act as a central reference point in facilitating onward reporting of suspicious transactions and for playing an active role in the identification and assessment of potentially suspicious transactions and shall have access to and be able to report to senior management at the next reporting level or the Board of Directors. Names, designation and addresses (including email addresses) of Principal Officer including any changes therein shall also be intimated to the Office of the Director-FIU. As a matter of principle, it is advisable that the Principal Officer is of a sufficiently senior position and is able to discharge the functions with independence and authority. 15. Employees Hiring/Employee s Training/ Investor Education 15.1 Hiring of Employees 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. 15.2 Employees Training 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, back office staff, compliance staff, risk management staff and staff dealing with new clients. It is crucial that all those concerned fully understand the rationale behind these directives, obligations and requirements, implement them consistently and are sensitive to the risks of their systems being misused by unscrupulous elements. 15.3 Investors Education Implementation of AML/CFT measures requires intermediaries to demand certain information from investors which may be of personal nature or has hitherto never been called for. Such information can include documents evidencing source of funds/income tax returns/bank records etc. This can sometimes lead to raising of questions by the client with regard to the motive and purpose of collecting such information. There is, therefore, a need for intermediaries to sensitize their clients about these requirements as the ones emanating from AML and CFT framework. Intermediaries shall prepare specific literature/ pamphlets etc. so as to educate the client of the objectives of the AML/CFT programme. 16. Annexure: List of various reports and their formats 1. Cash Transaction Report Version 1.0 (Guidance Note) 2. Summary of cash transaction report for an intermediary 3. Cash Transaction Report for an Intermediary 4. Annexure A- Individual data sheet for an intermediary 5. Annexure B- Legal person/Entity detail sheet for an intermediary 6. Suspicious Transaction Report Version 1.0 (Guidance Note) 7. Suspicious Transaction Report for an intermediary 8. Annexure A- Individual Detail Sheet for an intermediary 9. Annexure B- Legal Person/ Entity Detail Sheet for an intermediary 10. Annexure C- Account Detail Sheet for an intermediary