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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 under.X X X X Extracts X X X X X X X X Extracts X X X X ..... stry 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 nonbanking 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 made 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 and essential principles that concern combating Money La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected 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 measures taken t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcement 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 acceptance of clients b) Procedure for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership 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 not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies. iv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 business with such a person and file a suspicious activity report. It shall also evaluate whether there is suspicious trading in determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors give rise to a belief that the customer does not in fact pose a low risk 2.2.3.3 Risk Assessment2 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 the level of overall risk and the appropriate level and type of mitigation to be applied. The assessment shall be documented, updated regularly and made available to competent authorities and self-regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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)3 2.2.6.1 Registered intermediaries may rely on a third party for the purpose of a) identification and verification of the identity of a client and b) Determination of whether the client is acting on behalf of a beneficial owner, identification of the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required under the SEBI Act, Rules and Regulations framed thereunder PMLA, other relevant legislations, Rules and Regulations or Exchange byelaws 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 forgery of a valuable security or a document has taken place facilitating the transactions; d) all suspicious transactions whether or not made in cash and by way of as mentioned in the Rules. 2.4. Information to be maintained 2.4.1 Intermediaries are required to maintain and preserve th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been closed. 2.5.5 Records of information reported to the Director, Financial Intelligence Unit - India (FIU - IND)5: 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 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 2.7.4 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation (CTCR) Division, the Government has modified the earlier order dated August 27, 2009 by the order dated March 14, 2019 (Annexure 2) for strict compliance.7 2.10. Reporting to Financial Intelligence Unit-India 2.10.1 In terms of the PML Rules, intermediaries are required to report information 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 2.10.2 Intermediaries shall carefully go through all the reporting requirements and formats that are available on the website of FIU - IND under the Section Obligation of Reporting Entity - Furnishing Information - Reporting Format (https://fiuindia.gov.in/files/downloads/Filing_Information.html). These documents contain detailed directives on the compilation and manner/procedure of submission of the reports to FIU-IND. The related hardware and technical requirement for preparing reports, the related data files and data structures thereof are also detailed in these documents While detailed instruction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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. 2.11.2 Appointment of a Designated Director:8 2.11.2.1 In addition to the existing requirement of designation of a Principal Officer, the registered intermediaries shall also designate a person as a 'Designated Director'. In terms of Rule 2 (ba) of the PML Rules, the definition of a Designated Director reads as under: "Designated director means a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the Act and the Rules and includes - a) the Managing Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. SCHEDULE I List of key circulars/ directives issued with regard to KYC, CDD, AML and CFT S.No. Circular Number Date of Circular Subject Broad area covered 1. SEBI/HO/MIRSD/DOP /CIR/P/2019/69 May 28, 2019 Combating Financing of Terrorism (CFT) under Unlawful Activities (Prevention) Act, 1967 - Directions to stock exchanges, depositories and all registered intermediaries Procedure to be followed for the freezing of assets of individual or entities engaged in terrorism 2. SEBI/HO/IMD/FIIC/ CIR/ P/ 2017/068 June 30, 2017 Acceptance of e -PAN card for KYC purpose E-PAN issued by CBDT for KYC compliance by FPI 3. SEBI/HO/MRD/DP/CIR/ P/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and additions to Master Circular CIR/ISD/AML/3/2010 dated December 31, 2010 in respect of Risk Assessment, Reliance on third party for carrying out Client Due Diligence (CDD), Record keeping requirements, Records of information reported to the Director, Financial Intelligence Unit - India (FIU-IND), Appointment of a Designated Director 12. CIR/ MIRSD/ 13/2013 December 26, 2013 Know Your Client requirements Shifting of certain information in Section C of Part I to Part II of the AOF, information required to be captured in the systems of KRAs 13. CIR/MIRSD/ 09/2013 October 8, 2013 Know Your Client Requirements Acceptance of e-KYC service launched by UIDAI as a valid process for KYC verification 14. CIR/ MIRSD/ 07/2013 September 12, 2013 Know Your Client Requirements for Eligible Foreign Investors Partial modification to the provisions of circular No CIR/MIRSD/11/2012 dated September 5, 2012, Classification of Eligible foreign investors investing under Portfolio Investment Scheme ('PIS') route as Category I, II and III 15. CIR/MIRSD/ 4/2013 March 28, 2013 Amendment to SEBI {(Know Your Client) Registration Agency} Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (KYC) Requirements for the Securities Markets Clarification w.r.t different KYC forms used by Market Intermediaries, Guidelines for KYC form capturing the basic details about the client and additional details specific to the area of activity of the intermediary being obtained 25. CIR/MIRSD /16/2011 August 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 26. 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 27. 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. 28. CIR/MRD/ DMS/13/2010 August 31, 2010 Guidelines on the Execution of Powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of depository participant. 39. 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. 40. F.No.47- 2006 /ISD/ SR/ 118153/ 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 41. 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 non - body corporates 42. 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. 43. 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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