In its updated guidelines on anti-money laundering (AML) standards and combating financing of terrorism (CFT) obligations for the securities of market intermediaries, market regulator SEBI has put the onus of knowing customers on the intermediaries.
The guidelines, applicable to all intermediaries registered with SEBI and recognised stock exchanges, have introduced key additions and explanations to the previous SEBI circular dated October 15, 2019 (which now stands rescinded).
Lawyers Nikhilesh Panchal, Amiya Kumar Pati and Srishti Suresh of law firm Khaitan & Co have observed that the guidelines have incorporated elements from several notifications issued by the Ministry of Home Affairs in the recent past that were related to the powers of the Central Government under Section 51A of the Unlawful Activities (Prevention) Act, 1967 (UAPA).
The guidelines are based on the Prevention of Money Laundering Act (PMLA), 2002, and “provide guidance on the practical implications of the statute”, according to Namitha Mathews and Anukriti Goswami of Argus Partners.
The registered intermediaries must implement measures to identify and discourage money laundering and terrorist financing and adhere to the prescribed client account opening procedures, maintenance records, and reporting of transactions.
SEBI is empowered to specify the information that intermediaries must maintain, as also mandate reporting entities to have an internal mechanism to detect specified transactions and furnish information, Mathews and Goswami say.
Violating the prohibitions on manipulative and deceptive devices, insider trading, and substantial acquisition of securities or control will be treated as scheduled offences under PMLA.
Salient features of the modified guidelines include:
Enhanced due diligence for special category clients and clients who open accounts without visiting the office of intermediaries (video-based customer identification is allowed);
suspicious activity report to be filed if the identity of the client or the information furnished appears fake (Panchal, Pati and Suresh note that it is unclear which authority must be notified);
for existing clients, the intermediary should freeze the account if there is suspicious trading.
The intermediaries can outsource due diligence of clients, but in line with rule 9(2) of the PMLA Rules, 2005, the third party must be monitored by the intermediary — ultimately, the intermediary is responsible for the third party’s actions.
The third party shall not be located in any country classified as ‘high risk’ by the Financial Action Task Force (FATF).
Cash transactions exceeding ₹10 lakh or its equivalent in foreign currency, or series of transactions integrally connected or remotely connected and exceeding ₹10 lakh must be recorded.
Credits or debits into or from any non-monetary account must be noted and suspicious transactions must be reported.
Writing in Mondaq, Panchal, Pati and Suresh note that SEBI is alerting registered intermediaries that breach of PMLA and UAPA provisions would invite serious consequences under anti-corruption laws.
While this may increase costs for registered intermediaries, it will be worth it, they say.