KYC-AML Guideline
Stock Broker has designed this policy of PMLA and effective AML program to prohibit and actively prevent the money laundering or the funding of terrorist or criminal activities or flow of illegal money or hiding money to avoid taxes.
1) Background: The PMLA came into effect from 01st July 2005. SEBI has issued guidelines on Know Your Customer (KYC) Standards and AML (Anti-Money Laundering) standards vide a circular dated on 18th January 2006.
The guidelines issued with the circular are in the context of the recommendations made by the Financial Action Task Force (FATF) on Anti money laundering standards. Compliance with these standards by all Capital Market intermediaries registered with SEBI has become imperative. SEBI vide its circular No. ISD/CIR/RR/AML/2/06 dated March 20, 2006, has further issued guidelines with respect to maintenance and preservation of records of transactions, information to be maintained, reporting to Financial Intelligence Unit (FIU) – India.
2) What is Money Laundering: Money Laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through Money laundering, the laundered transforms the monetary proceeds derived from criminal activity in to funds with an apparently legal source.
As per Section (3) of the PMLA Act, 2002 enacted in the January 2003 and came to force on 01st July, 2005 defines Money Laundering as under:
Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of Money laundering.
3) Prevention of Money Laundering Act: The prevention of Money Laundering Act, 2002 (PMLA) has been brought into force with effect from 01st July, 2005. As per the PMLA, every Banking Company, Financial institution and Intermediaries (which includes a Depository participants, Stock Broker, Sub Broker, Banker to an issue, Trustee to a trust deed, Registrar to an issue, Merchant Banker, Underwriters, Portfolio Manager, and any other intermediary associated with securities market) shall have to maintain a record of all the transactions, the nature and the value of which has been prescribed in the rules notified under the PMLA. For the purpose of PMLA, transactions include:
1. All cash transactions of the value of more than Rs. 10 Lakhs or its equivalent in foreign currency.
2. All series of Cash transactions integrally connected to each other which have been valued below Rs. 10 lakhs or equivalent in foreign currency where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of Rs. 10 lakhs rupees or its equivalent in foreign currency.
3. All suspicious transactions whether or not made in cash and including, interalia, credits or debits into from any non-monetary account such as demat account, security account maintained by the registered intermediary.
“Suspicious Transactions” means a transaction whether or not made in Cash which to a person acting in good faith.
• Gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or
• Appears to be made in circumstances of unusual or unjustified complexity; or
• Appears to have no economic rationale or bonafide purpose.
Financial Intelligence Unit (FIU)-India: The Government of India set up Financial Intelligence Unit – India (FIU – IND) on November 18, 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU – IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU – IND is an independent body to report directly to the Economic Intelligence Council (EIC) headed by the finance minister.
4) Policy of Stockbroker: It has resolved that it would, as an internal policy, take adequate measures to prevent Money Laundering and shall put in place a framework to report cash and suspicious transactions to FIU as per guidelines of PMLA Rules, 2002.
Implementation on this policy:
Appointment of Principal Officer:
The company has designated the Principal Officer who shall be responsible for implementation and compliance of this policy shall include the following:
1. Compliance of the provisions of the PMLA and AML Guidelines act as a central reference point and play an active role in identification & assessment of potentially Suspicious Transactions; and
2. Ensure that Stock Broker discharges its legal obligation to report Suspicious Transactions to the concerned authorities.
3. The employees are trained to address issues regarding the application of the PMLA.
4. The staff selection and training process complies with the PMLA policy.
Appointment of Designated Director:
“Designated Director” means a person designated by the Board of Directors to ensure over all compliance with the obligations imposed under The Prevention of Money Laundering Act, 2002 and the Rules framed there under, as amended from time to time, and include the Managing Director or a Whole‐time Director duly authorized by the Board of Directors. The Company shall appoint a Designated Director and communicate the details of the Designated Director, such as, name, designation and address to the Office of the Director, FIU‐IND and update the same whenever there is any change.
Obligation to Establish Policies and Procedures: 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.
To be in compliance with these obligations, the senior management shall be fully committed to establishing appropriate policies and procedures for the prevention of PMLA and TF and ensuring their effectiveness and compliance with all relevant legal and regulatory requirements. We will ensure:
• Issue a statement of policies and procedures, on a group basis where applicable, for dealing with PMLA and TF reflecting the current statutory and regulatory requirements.
• Ensure that the content of these Directives are understood by all staff members.
• Regular yearly review the policies and procedures on the prevention of PMLA 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.
• Adopt client acceptance policies and procedures which are sensitive to the risk of ML and TF
• Undertake client due diligence (“CDD”) measures to an extent that is sensitive to the risk of ML and TF depending on the type of client, business relationship or transaction.
• Have in system a place for identifying, monitoring and reporting suspected PMLA or TF transactions to the law enforcement authorities; and
•Develop staff members’ awareness and vigilance to guard against PMLA and TF
Policies and Procedures to Money Laundering and Terrorist Financing:
• 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.
• Client acceptance policy and client due diligence measures, including requirements for proper identification.
• Maintenance of records.
• Compliance with relevant statutory and regulatory requirements.
• Co-operation with the relevant law enforcement authorities, including the timely disclosure of information;
• 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.
5) Implementation of this Policy:
Client Due Diligence (CDD): The main aspect of this policy is the Customer Due Diligence process, which means:
1. Ensure that KYC norms are strictly followed, and all the information provided in the KYC form are obtained and filled up.
2. Obtain sufficient information in order to identify persons who beneficially own or control 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 should 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 on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.
3. To verify the customer’s identity using reliable, independent source document, data or information.
4. To 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;
5. 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 customer, its business and risk profile, taking into account, where necessary, the customer’s source of funds.
5.1) Client Identification Policy:
Clients other than individuals or trusts: Where the client is a person other than an individual or trust, viz., company, partnership or unincorporated association/body of individuals, the intermediary shall identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the following information:
a. The identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest.
Explanation:
Controlling ownership interest means ownership of/entitlement to:
i. More than 25% of shares or capital or profits of the juridical person, where the juridical person is a company;
ii. More than 15% of the capital or profits of the juridical person, where the juridical person is a partnership; or
iii. More than 15% of the property or capital or profits of the juridical person, where the juridical person is an unincorporated association or body of individuals.
b. In cases where there exists doubt under clause above as to whether the person with the controlling 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 would include exercised through voting rights, agreement, arrangements or in any other manner.
c. Where no natural person is identified under any of clauses above, the identity of the relevant natural person who holds the position of senior managing official.
For client which is a trust: Where the client is a trust, the Company 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.
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 majorityowned subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies.
Applicability for foreign investors: Dealing with foreign investors’ may be guided by the clarifications issued vide SEBI circulars CIR/MIRSD/11/2012 dated September 5, 2012 and CIR/ MIRSD/ 07/ 2013 dated September 12, 2013, for the purpose of identification of beneficial ownership of the client.
d. To 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). d. To 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); and
e. To understand the ownership and control structure of the client.
f. To 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. To periodically update all documents, data or information of all clients and beneficial owners collected under the CDD process.
5.2) Client Acceptance Policy: Client acceptance policies and procedures aim to identify the types of clients that are likely to pose a higher than average risk of ML or TF. To apply client due diligence on a risk sensitive basis depends on the type of client business relationship or transaction. The following safeguards shall be followed by the company while accepting the clients.
• No account is opened in a fictitious/ benami name or on an anonymous basis
• Risk Perception: Based on clients location, nature of business activity, trading turnover, manner of making payment for transactions undertaken, clients should be classified into low, medium and high risk category. Though as per guidelines issued by SEBI and practiced by the company this system of making payments to and for receiving payments from, clients is through banking channels only and in the manner specified, the following points are to be ensured.
• No payment in cash is either accepted or made to the client.
• Include this in “Do’s and ‘Don’ts’ issued in writing to the clients as part of client registration.
• Discourage payment by clients by DD. In exceptional cases DD’s may be accepted if the same is accompanied by documentary evidence such as bank statement and cheque.
• Ensure that the internal control policy in this regard are strictly followed − Ensure that no account is opened where the intermediary is unable to apply appropriate clients due diligence measures / KYC policies. Such cases are where:
1. It is not possible to ascertain the identity of the client
2. Information provided is suspected to be non genuine.
3. It appears that client does not co-operate by providing full and complete information.
• Ensure that identity of the client does not match with any person having known criminal background or is not banned in any other manner. An adequate system to prevent the entry of any suspended / debarred PAN No. into our system.
• The following are considered as Clients Special Category (CSC) and in respect of all them utmost care should be taken to clearly identify the client before the account is opened. The category of clients referred to herein are:
(a) Non-resident clients
(b) High net worth clients,
(c) Trust, Charities, NGOs and organizations receiving donations
(d) Companies having close family shareholdings or beneficial ownership
(e) Politically exposed persons (PEP) of foreign origin
(f) Current / Former Head of State, Current or Former Senior High-profile politicians and connected persons)
(g) Companies offering foreign exchange offerings
(h) Clients in high risk countries (where existence/effectiveness of money laundering control 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 centres, tax haven, countries where fraud is highly prevalent.
(i) Non face to face clients
(j) Clients with dubious reputation as per public information available etc.
• As far as possible reference and confidential report about the genuineness of the client should be obtained from the client’s bankers in respect of all cases other than (e),(g),(h),(i) and (j)
• In respect of those listed as (e), (g), (h), (i) and (j) avoid dealing with them and do not open any account for them.
• As far as possible and except where it is unambiguously made known that the voluntary donations and other receipts of the Trust/Charitable Organizations/NGO are from genuine sources and not from unidentified or fictitious person, no account of trust/ charitable organization/NGO should be opened.
6) Reliance on third party for carrying out Client Due Diligence (CDD).
1. We 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 beneficial owner and verification of the identity of the beneficial owner.
2. Such reliance shall be subject to the conditions that are specified in Rule 9 (2) of the PML Rules and shall be in accordance with the regulations and circulars/ guidelines issued by SEBI from time to time.
a) Risk Based Client Categorization:
Each client will be marked into three categories, High Risk, Medium Risk and Low Risk from the point of view of the anti-money laundering laws. The categorization will be made based on the following parameters/factors of risk perception.
1. High Net-worth clients
2. Trusts/ NGOs / Charities receiving donations
3. Companies having close family shareholdings
(The above are considered of High Risk as per SEBI guidelines)
• The other parameters are nature of business activity, trading turnover, manner of making payment etc. Provision will be made in the back office software for noting this categorization. The high risk client will require regular KYC update.
• The clients will be placed under low, medium and high risk category based on their Turnover and ledger history. Corporates / HNIs having respectable social and financial standing.
• Clients who make the payment on time and take delivery of shares can be considered as Low risk clients. Intra-day clients or speculative clients whose turnover is not in line with the Financials declared as considered as Medium risk clients. Client doing large activity in Dormant Account, trading on a regular basis in illiquid scrips in large volume and quantity, those who have defaulted in the past and have suspicious background are to be considered as High Risk Category.
b) Monitoring of Transactions:
• Regular monitoring of transactions is required for ensuring effectiveness of the Anti Money Laundering procedures.
• Special attention required to all complex, unusually large transactions which appear to have no economic purpose.
• Internal threshold limits are set to specify for each class of client’s accounts and pay special attention to the transaction, which exceeds these limits.
• All records of transaction is preserved and maintained in terms of the PMLA 2002 and that transaction of suspicious nature or any other transaction notified under section 12 of the Act is reported to the appropriate authority.
• All suspicious transactions to be regularly reported to the higher Authorities /HOD. Further the compliance department should randomly examine selected transaction undertaken by clients to comment on their nature i.e. whether they are in the suspicious transactions or not.
c) Suspicious Transactions:
• Suspicious transactions involve funds which are derived from illegal activities or are transactions that are intended/ conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under the law;
• The transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.
• Criteria giving rise to suspicion:
• It is difficult to define exactly what constitutes suspicious transactions and as such given below is a list of circumstances where transactions may be considered to be suspicious in nature. This list is only inclusive and not exhaustive. Whether a particular transaction is actually suspicious or not will depend on the background, details of the transactions and other facts and circumstances.
a. Complex /unusually large transactions/ patterns which appear to have no economic purpose.
b. Client having suspicious background or links with known criminals.
c. Clients whose identity verification seems difficult.
E.g.
1. False identification documents
2. Identification documents which could not be verified within reasonable time
3. Non face to face Client
4. Doubt over the real beneficiary of the account
5. Accounts opened with names very close to other established business entities.
d. Client appears not to co-operate.
e. Use of different accounts by Client alternatively
f. Sudden activity in dormant accounts
g. Multiple accounts
i. Large number of account having a common account holder, authorized signatory with no rationale
ii. Unexplained transfers between multiple accounts with no rationale
h. Asset management services for clients where the sources of funds is not clear or not in keeping with the clients’ apparent standing/business activity
i. Substantial increase in business without apparent cause (Unusual activity compared to past transactions)
j. Activity materially inconsistent with what would be expected from declared business
k. Inconsistency with clients apparent financial standing
l. In any account circular trading
- Unusual transactions by Clients of Special Category (CSCs) and business undertaken by shell corporations, offshore banks/financial services, businesses reported to be in the nature of export-import of small items
- A transaction which gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime.
- A transaction which appears to be a case of insider trading
- Transactions that reflect likely market manipulations
- Suspicious off market transactions
- Value of transaction just under the reporting threshold amount in an apparent attempt to avoid reporting
- Inconsistency in the payment pattern by the client
- Trading activity in account of high risk clients based on their profile, business pattern and industry segment
- Accounts based as ‘passed through’. Where no transfer of ownership of securities or trading is occurred in the account and the account is being used only for funds transfers / layering purposes.
- Large deals at prices away from the market
- Suspicious off market transactions
- Purchases made in one client’s account and later on transferred to a third party through off market transactions through DP Accounts;
- Multiple transactions of value just below the threshold limit specified in PMLA so as to avoid possible reporting;
- Reporting of Suspicious Transactions:
In terms of the PMLA rules, brokers and sub-brokers are required to report information relating to cash and suspicious transactions to the Director, Financial Intelligence Unit-India (FIU-IND) 6th Floor, Hotel Samarat, Chanakyapuri, New Delhi – 110021 as per the schedule given below:
The Principal Officer will be responsible for timely submission of CTR, STR and NTR to FIU-IND. Utmost confidentiality shall be maintained in filing of CTR, STR and NTR to FIU-IND. No nil reporting needs to be made to FIU-IND in case there are no cash/ suspicious/ non – profit organization transactions to be reported.
Irrespective of the amount of transaction and/or the threshold limit envisaged for predicate offences specified in the PMLA, 2002, an STR shall be filed, if there is reasonable grounds to believe that the transactions involves proceeds of crime.
- Maintenance of Records:
Following are the Document Retention Terms should be observed:
- All necessary records on transactions, both domestic and international, should be maintained at least for the minimum period of FIVE YEARS (5) from the date of cessation of the transaction.
- Records on customer identification (e.g. copies or records of official identification documents like passports, identity cards, driving licenses or similar documents), account files and business correspondence should also be kept for the FIVE YEARS (5) from the date of cessation of the transaction.
- Records shall be maintained in hard and soft copies.
- In situations where the records relate to on-going investigation or transactions, which have been the subject of a suspicious transaction reporting, they should be retained until it is confirmed that the case has been closed.
7). Employees Hiring, Employees Training and Monitoring:
- Hiring of Employees
- The Department Heads shall be involved in hiring of new employees, shall adequately carry out the screening procedure in place to ensure high standards in hiring new employees.
- Bona fides of employees are checked to ensure that the employees do not have any link with terrorist or other anti-social organizations.
- Reference of candidate:- Candidate having reference would be called for the interview. In case of employee having applied through newspaper would be called for the interview after scrutinizing his/her bio-data.
- Background of the candidate:- Background of the employee should be clean & under no circumstances candidate who has left earlier employer due to dispute should be selected.
- Third party verification of candidate:- If necessary third party verification should be done by making phone call.
- Experience: – Candidate should have to appear for the skilled test depending on the exposure. vii. Candidate should be aware for PMLA 2002 guidelines. Proper training should be given if he/she is not aware.
- Training on prevention of Money Laundering:
The Company shall provide anti-money laundering training to all its new employees at the time of joining the organization and updates would be provided on periodic basis. We have an ongoing employee training program conducted by our Principal Officer and Senior Management, participation of all the Key employees in the Seminars conducted by various Regulatory bodies from time to time, so that members of the staff are adequately trained in PMLA and CFT procedures.
All the circulars issued by various Regulatory bodies including that of PMLA, are circulated to all the staff members and the same are also being discussed in length, in the Training program. Training program shall have special emphasis on front line staff, Back office staff, Compliance Staff, RMS Staff and Staff dealing with clients.
Our training will include, at a minimum: how to identify red flags and signs of money laundering that arise during the course of the employees”, duties; what to do once the risk is identified; what employees roles are in the firm’s compliance efforts and how to perform them; the firm’s record retention policy; and the disciplinary consequences (including civil and criminal penalties) for noncompliance with the PMLA Act.
- Monitoring Employee Conduct and Accounts:
We will subject employee Accounts to the same AML procedures as customer accounts, under the supervision on the Principal Officer. We will also review the AML performance of supervisors as part of their annual performance review. The Principal Officer’s Accounts will be reviewed by the Board of Directors.
- Investor Education:
As the implementation of AML/CFT measures being sensitive subject and requires us to demand and collect certain information from investors which may be of personal in nature or has hitherto never been called for, which information include documents evidencing source of funds/income tax returns/bank records etc. and 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 us to sensitize the clients about these requirements, as the ones emanating from AML and CFT framework. We shall circulate the PMLA Circulars and other specific literature/pamphlets etc. so as to educate the client of the objectives of the AML/CFT program. The same shall also be emphasized on, in the Investor Awareness Programs conducted by us at frequent intervals of time. The importance of the same is also made known to them at the time of opening the Account.
Review of the PMLA Policy & Procedures: The policy shall be reviewed from time to time as and when required by the Management and also implement the change after any change in the Anti Money Laundering Act 2002 or change in any other act, bye-laws, rules, regulations of SEBI or in any statutory and regulatory government department related to or affect to this.
