S Harish Chandan, SEBI Registered Research Analyst, Registration No. INH000012768.
Provisions of the Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering and related crimes. The PMLA and the rules notified thereunder came into force from 1 July 2005. Under the PMLA, all entities registered with SEBI are required to furnish information on all suspicious transactions, whether or not made in cash, to FIU-IND. Under Section 3 of the PMLA, projecting the proceeds of crime as untainted property is an offence of money laundering, punishable under Section 4 of the PMLA.
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 launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.
The Financial Intelligence Unit India (FIU-IND) is the central national agency responsible for receiving, processing, analysing and disseminating information on suspect financial transactions, and for coordinating and strengthening the efforts of national and international intelligence, investigation and enforcement agencies in combating money laundering and related crimes.
Section 2(1)(g) of the PMLA Rules defines a suspicious transaction, whether or not made in cash, as one 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 bona fide purpose; or
- gives rise to a reasonable ground of suspicion that it may involve the financing of activities relating to terrorism.
Policy and procedures for anti money laundering measures
The policy and procedures outlined below provide a general background on money laundering and terrorist financing, summarise the main provisions of the applicable legislation in India, and set out the steps a registered intermediary and its representatives should implement to discourage and identify any money laundering or terrorist financing activity.
As per the provisions of the Act, every banking company, financial institution and intermediary registered under Section 12 of the Securities and Exchange Board of India Act, 1992 shall maintain a record of all transactions, the nature and value of which are prescribed in the rules under the PMLA. Such transactions include:
- All cash transactions of a value of more than Rs. 10 lakh, or its equivalent in foreign currency.
- All series of cash transactions integrally connected to each other which have been valued below Rs. 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, including credits or debits into or from any non-monetary account such as a demat account or securities account maintained by the registered intermediary.
Written procedures are adopted to implement the anti money laundering provisions. These procedures include three specific parameters related to the overall client due diligence process: a policy for acceptance of clients, a procedure for identifying clients, and transaction monitoring and reporting, in particular Suspicious Transaction Reporting.
Client due diligence process
Customer due diligence measures comprise obtaining sufficient information to identify persons who beneficially own or control a securities account, verifying the client's identity, and identifying beneficial ownership and control.
As an organisation providing Research Analyst services, the details of a client's securities account are not shared with us, and execution services are not part of our service package. Accordingly, identifying the beneficial owner or controlling party of a client's securities account is the responsibility of the broker handling that account.
Since Research Analyst regulations do not envisage full KYC of clients, basic KYC documents establishing the identity and address of the client are collected in order to establish the identity of the clients to whom services are delivered.
Transaction data is not handled by us, as clients do not share such data with us as part of our research service. We provide a non-discretionary research recommendation service, execution of which is at the discretion of the client and handled by the client.
Policy for acceptance of clients
- No account is opened in a fictitious or benami name, or on an anonymous basis.
- No account is opened where we are unable to apply appropriate client due diligence measures or collect basic KYC documents.
- Client identification documents must not be found to be forged.
- A client is not permitted to act on behalf of another person or entity for service delivery.
- Clients whose identity matches a person or entity banned or debarred by SEBI or the stock exchanges are not accepted. The lists published by BSE and NSE are checked before onboarding.
- A risk assessment is conducted taking into account country specific information, using the updated lists of individuals and entities subject to sanctions under the various United Nations Security Council Resolutions. A client present on those lists is not onboarded.
Procedure for identifying clients
Client identification is carried out at the time of establishing the client relationship, that is at onboarding. Failure by a prospective client to provide satisfactory evidence of identity is recorded and reported to the higher authority, and service is not started for that client.
Maintenance of records
All client records are maintained for a minimum period of 10 years, or in the case of any regulatory action until the matter is resolved.
Audit
An audit of Research Analyst activities is carried out by an independent professional as permitted by the regulations. Any observations of the audit are taken up on a priority basis and corrective action is initiated.
Transaction monitoring and Suspicious Transaction Reporting
The only transaction encountered while delivering the service is the collection of fees, as we do not have access to client execution data. Fee collection is therefore through our bank account only, and no cash transaction is allowed for fee payment by clients.
Any suspicious transaction is immediately notified to the Compliance Officer in the form of a detailed report, with specific reference to the client, the transaction and the nature or reason for the suspicion. Compliance staff have timely access to customer identification data, other client due diligence information, transaction records and other relevant information.
The Principal Officer is responsible for the timely submission of Cash Transaction Reports and Suspicious Transaction Reports to FIU-IND. Utmost confidentiality is maintained in filing these reports. No nil reporting is made where there is no cash or suspicious transaction to report.
Reporting to FIU-IND
In terms of the PMLA rules, the Principal Officer reports information relating to cash and suspicious transactions to the Director, Financial Intelligence Unit India, 6th Floor, Hotel Samrat, Chanakyapuri, New Delhi 110021.
Role of staff
Principal Officer
- Communicating the policy on prevention of money laundering to employees.
- Receiving reports from employees on any suspicious dealing noticed by them.
- Clarifying any queries from employees on this matter.
- Ensuring that employees dealing with clients and prospective clients are aware of the guidelines and follow them strictly.
- Reporting any suspicious transactions to the appropriate authorities.
- Handling the compliance function and ensuring compliance with the policies, procedures and controls relating to the prevention of money laundering and terrorist financing.
- Evaluating the process where any gaps are identified.
Onboarding staff
- Staff dealing with customers or handling customer facing processes must be sensitive to anti money laundering requirements and obligations.
- Primary responsibility for compliance rests with onboarding staff, since they deal directly with customers.
- Onboarding staff carry out the KYC and customer due diligence process, and any further checks required, during new business and renewal.
- Default in carrying out obligations under anti money laundering law can attract action as per company policy.
- Any suspicious activity that comes to notice must be brought to our attention.
Communication of policy
A copy of this policy is provided to all management and relevant staff who handle account information, securities transactions, money and client records. An internal awareness session on this policy is conducted annually, in the first week of April.
Compliance with statutory and regulatory requirements
All activities are conducted in compliance with the relevant statutory and regulatory requirements. Appropriate client information is shared with relevant law enforcement authorities as and when sought, and timely disclosures are made as required.
Review of policy and procedures
The management of the research entity reviews the policies and procedures on the prevention of money laundering and terrorist financing to ensure their effectiveness whenever there is a change in the regulatory guidelines.