SEBI Guidelines to Securities Market Intermediaries - under the PMLA 2002

A.

Introduction

B.

Key pointers

Scheduled Offences: In line with the Prevention of Money Laundering Act 2002 (PMLA), any violation of the prohibition imposed on manipulative and deceptive devices, insider trading and substantial acquisition of securities / control as stipulated under Section 12A read with Section 24 of the SEBI Act, 1992 will be considered as a scheduled offence under Schedule B of PMLA.[1]

Policy for acceptance of clients by registered intermediaries and stock exchange:

Enhanced client due diligence has been prescribed for client of special category (CSC), and ‘Non-Face-To-Face clients” have been explained as ‘clients who open accounts without visiting the branch / offices of registered intermediaries or meeting the officers of the registered intermediaries’. On the other hand, it is clarified, that video based customer identification process will be treated as ‘face-to-face’ onboarding of clients.

Registered intermediaries are required to ensure that a client’s account is not opened without the intermediary completing the client due diligence measures. When the identity of the client or the information furnished by the client is suspected to be non-genuine, a suspicious activity report is to be filed by the intermediary. Unfortunately, the guidelines are silent on the authority with whom such a report has to be filed i.e. FIU-IND or SEBI.

In relation to the continuing clients, the intermediary is expected to continually evaluate the identity of its clients. Where there is suspicious trading, it will evaluate and freeze the account and shall discontinue its business with the client.

Registered intermediaries may permit a client to act on behalf of another person / entity only under specified circumstances. While these circumstances are not articulated in the Guidelines, one will have to assume that the same principle will apply that the other person / entity’s identity is capable of evaluation.

Reliance on third party for carrying out client due diligence

Registered intermediaries have been previously permitted to rely on third parties for the purpose of identification/ verification of the client. In line with rule 9(2) of the Prevention of Money Laundering (Maintenance of Records) Rules 2005 (PMLA Rules), the Guidelines lay down the following safeguards to be observed by registered intermediaries:

the third party should immediately send all client due diligence information of the client to the registered intermediary;

ensure that the third party is regulated, supervised or monitored and has measures in place for compliance with client due diligence and record-keeping; and

third party is not situated in any country or jurisdiction which is classified as a high risk jurisdiction by the Financial Action Task Force (FATF).

The registered intermediary will be primarily and ultimately responsible for the diligence of the client.

All cash transactions exceeding INR 10 lakhs or its equivalent in foreign currency, or series of transactions integrally connected or remotely connected / related, whose aggregate value exceeds INR 10 lakhs, must be recorded by the intermediary. Further, credits / debits into or from any non-monetary account are to be noted and where necessary, suspicious transaction reports are to be filed.

List of designated individuals / entities

Registered intermediaries are required to take note of the updated lists of persons designated as ‘terrorists’ by the Ministry of Home Affairs (MHA), under Section 35(1) of the UAPA.

Stock exchanges and registered intermediaries are required to file a suspicious transaction report (STR) with the Financial Intelligence Unit of India (FIU-IND), covering all transaction, specified under Section 35(1) of UAPA.[2]

A copy of STR and communication with the FIU-IND shall be parallelly shared with the UAPA Nodal Officer of the State / Union Territory where the account is held.

Jurisdictions which do not or insufficiently apply the FATF Recommendations: Registered intermediaries are expected to update themselves with the FATF Statements released from time to time and are also expected to update themselves with publicly available information relating to countries that do not or insufficiently apply the FATF Recommendations.

C.

Conclusion