Introduction
The Rules and Regulations framed out under the Anti-Money Laundering standard in order to prevent entry of entry of illegal money into the financial system and to combat Financing of Terrorism is called the Prevention of Money Laundering Act, 2002 (PMLA 2002). It is one of the legal frame-work put in place to combat Money Laundering (ML) and Terrorist Financing (TF) activities and came into force with effect from 1st of July 2005. 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 should be taken into consideration as and when required. 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 (ML) and Terrorist Financing (TF). The PMLA 2002 is in line with these measures and mandates that all intermediaries ensure the fulfilment of the aforementioned obligations.
The PMLA 2002 imposes obligations on all the financial market intermediaries to verify the identity of the client, maintain records and furnish information to FIU-IND.
In view of the above a procedure has been framed out as mentioned herebelow, which is binding on all the employees of the organisation. The procedure outlines the steps that should be implemented in order to discourage and identify any Money Laundering (ML) and Terrorist Financing (TF) activities. The relevance and usefulness of these procedures will be kept under review and it may be necessary to amend the same from time to time.
Objective
Money Laundering has become one of the major concerns for the financial community the world over. It is being done through any transactions or a series of transactions that seek to conceal or disguise the nature or source of proceeds derived from illegal activities.
The objective of this document/policy is to have in place adequate policies, practices and procedures that promote high ethical and professional standards and prevent the Company from being used intentionally or unintentionally by criminal elements. At the same time it may also be ensured that the clients are not unnecessarily harassed or put to any difficulty.
A sound KYC not only contributes to the intermediary’s overall safety and soundness, they also protect the integrity of the financial system by reducing the likelihood of an intermediaries becoming vehicles for Money Laundering (ML), Terrorist Financing (TF) and other unlawful activities.
Applicability
The directive describes how to maintain the records of transactions and the criteria for terming any particular transaction to be suspicious under the Prevention of Money Laundering Act, 2002. It also describes various steps to be ensured strictly while processing the instructions.
As per the provisions of the PMLA, all intermediaries associated with the finance industry as well as the securities market and registered under Section 12 of the SEBI Act, shall have to maintain a record of all the transactions; the nature and value of which has been prescribed as follows:
All cash transactions of the value of more than rupees ten lakh or its equivalent in foreign currency.
All series of cash transactions integrally connected to each other which have been valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within one calendar month.
All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non-monetary account such as demat account, security account maintained by the registered intermediary.
Frequent Off-Market transfers from one BO account to another should be scrutinised and asked for.
Turnover of the client should be in accordance to their declared income range. Due care to be taken while updating the client’s financial details and the same should be done periodically.
It may, however, be clarified that for the purpose of suspicious transactions report, apart from ‘transactions integrally connected’, ‘transactions remotely connected or related’ shall also be considered.
Though the directives lay down the minimum requirement, it is emphasized that we may, according to our requirements, ask for additional details and/or documents from the client at any time, so as to comply with the aforementioned requirement.
We at PRSSB Ltd has resolved, as part of our internal policy, to take adequate measures to prevent money laundering. Hence, it is to be ensured that the above directive is implemented and adhered to strictly by all concerned in all means. At the same time it is also to be ensured that the details of the clients viz; information relating to the account, transaction undertaken, etc., which are very vital and sensitive in nature should be handled in a confidential manner and the same should be provided only to the relevant authorities as required under the Act, Rules and Regulations of Anti Money Laundering or SEBI or under the Law.
Implementation
It may be noted by all that Mr. Jigen P. Sharedalal is the Designated Director. Also Mr. Pragnesh D. Shah and Mr. Chintan J. Patel have been appointed as the Principal Officer for Trading and Depository respectively under the aforementioned act and shall be responsible for the compliance of the provisions of the PMLA and AML guidelines. The details of the Principal Officer, as required under the PMLA 2002, has been intimated to the Financial Intelligence Unit – India (FIU-IND) and any changes in the same shall also be intimated as and when required. Alerts provided by the exchanges and depository are to be checked and verified on daily basis and the same are to be responded on timely manner on various portals of the exchanges and depository. If necessary, appropriate actions are to be taken for the said alerts.
The main aspect of PMLA is the Customer Due Diligence (CDD) process which includes the following:
Customer Acceptance Policy
Customer Identification Procedure
Risk Management
Monitoring of Transactions
Record Keeping
Suspicious Transaction Identification and Reporting (STR)
Registering a client for opening of their Demat account or a trading account is the primary stage when the client starts their association with us. This is a very crucial and an important stage of our association with a client. If the intention of the client is judged in the beginning itself, then preventive steps can be taken at the preliminary stage, thereby preventing heavy damage to the whole system. However, at certain times, it is very difficult to judge the intentions of a person. Therefore, it is necessary to identify the client by collecting informations and verifying them through various reliant sources to make sure the authenticity of the client and that the client will be the ultimate beneficial owner of the securities that he/she would be transacting in through us.
The process adopted for doing the above is called ‘Know Your Client’ (KYC). It helps us in preventing ourselves to be used, intentionally or unintentionally by criminal elements for money laundering activities.
Keeping in line with the requirement of the above mentioned policy, as per the requirement of SEBI intimated through their circular ref. no. ISD/CIR/RR/AML/1/06, dated 18th January, 2006, CIR/ISD/AML/3/2010, dated 31st December, 2010 and various other circulars and guidelines issued from time to time, we have framed out a procedure as laid down here below;
A] Customer Acceptance Policy (CAP)
The account shall not be opened in any fictitious/benami name.
The KYC requirement, in the format as prescribed by SEBI, has to be fulfilled for all the clients.
For fulfilling the KYC requirement, either the client should visit any of our offices or one of our officers’ must visit the client at his/her/their office/residence address.
During the above, the risk perception of a client in regards to the clients’ identity, location (correspondence address / other address, if applicable), nature of business activity, manner of making payment for transactions, etc should be taken into consideration. If required, an enquiry is to be conducted through our own reliable source in order to identify and further verify the authenticity of the client.
Stringent verification is to be done for account wherein authorised persons are appointed for its operation.
Documents and information, including some of the personal as well as financial details, as per the perceived risk, should be collected from the client. In case any client refuses to provide such additional details, the application of these clients should be rejected.
The client needs to be introduced by an existing client. If not, he should be an existing client for any of our other products or should have a reference from any person associated with us so that such client is proved to be a legal and authentic.
Accounts for Clients of Special Category (CSC) as well as Politically Exposed Person (PEP) should be opened only after getting an approval from the Senior Management.
Please ensure that the identity of the client does not match with person having any criminal records or a banned entity. If so, further verification of the client may be done if still there is any doubt, such applications may be rejected.
The clients are to be classified into various risk categories based on their risk perception.
Once the KYC form is duly filled-up and all the documents are executed, the same has to be submitted at our office with the necessary supporting documents viz; Permanent Account Number (PAN) card, proof of identity (POI), proof of address (POA), etc.
These documents are to be verified by the receiving person, including the copies of the supporting documents with their corresponding originals. The details of the PAN card are to be verified with the debarred person lists provided on periodic basis by SEBI and FIU-India with the help of reports and alerts generate as per Analyser and Control – PMLA (SOS) software. Stringent verification of the supporting documents is mandatory to ensure the authenticity of the prospective client.
Once the above procedures are completed and the authenticity verified, the KYC form is to be sent for processing and the Client ID/Code is generated through the system. This procedure adopted by us helps us to ensure that no account is opened in a fictitious / benami name or on an anonymous basis.
After processing the KYC and application of the client, the KYC data is then uploaded onto the KRA (KYC Registration Agency) and then the KYC form alongwith its supporting documents are sent to the concerned KRA
B] Customer Identification Procedure (CIP)
Customer identification for each customer, whether existing or new, is an essential element of an effective customer due diligence programme. Sufficient and additional information and/or documents, as prescribed by the authority necessary to establish the identity of new clients, whether regular or occasional, upto our satisfaction, is to be obtained.
Besides risk perception, the nature of information and/or documents required would also depend on the type of the client i.e. Individual, Corporates, etc. Identification procedure of the client may be conducted at different stages as and when it is required. No account should be opened or closed unless the identity of the client has been verified as per the prescribed guidelines.
The list of documents acceptable for the above procedure is as prescribed by SEBI as well as mentioned in the latest Master Circular issued in regard to KYC Procedure.
C] Risk Management (RM)
An effective and sound KYC procedure will help us to understand the risk a particular client is likely to pose and be in a better position to apply appropriate customer due diligence process. The aim is to identify clients who are likely to pose higher than average risk. Segregating the clients into different risk level i.e. Low, Medium and High will make our job much easy in dealing with them. Besides, it will also help us in understanding the clients in a much better way.
For a better implementation of Money Laundering Act, KYC of high risk and medium risk category clients need to be done for every three and five years respectively.
The factors of risk perception depend on the client’s location, nature of business activity, turnover, nature of transaction, manner of payment, etc. The risk perception of each client keep on changing from time to time and the information/documents pertaining to the same, along with supporting documents, wherever required, should be obtained and updated in our system periodically.
D] Monitoring of Clients’ transactions
Regular and continuous monitoring of transaction as well as understanding of clients’ normal and reasonable activity is essential to identify the deviant transactions/activities and for ensuring the effectiveness of Anti Money Laundering procedure. This monitoring should be in accordance to the risk sensitivity of the client. High risk accounts should be subjected to intensive monitoring.
Prior to monitoring the transactions, each client on being granted registration with us, should be given a threshold limit as per the risk category in which they may fall according to their KYC. This will help us in paying particular attention to the transactions which exceeds this limit.
Account operated by Clients of Special Category and PEPs should be monitored on a regular basis and the source of funds for transactions should be verified.
Complex and unusually large transactions should be paid special attention and the details, especially financial background should be verified and called for.
Any suspicious transaction or any transaction of suspicious in nature should be brought to the notice of the higher authorities or the head of the department, who in turn will report the matter to the concerned authority in the form of a detailed report with specific reference to the clients’ transactions and the nature / reason of suspicion. The following factors should be considered for the same;
- The nature of the transactions;
- The amount of the transaction and the currency in which it was denominated;
- The date on which the transaction was conducted; and
- The parties to the transaction.
The concerned authority should conduct periodic examination of select transactions of the clients randomly and comment on their nature.
Transactions in ‘Z’ Category stocks are not permitted at branch levels. However, in case any client is already holding such scrip in their Demat account, the same can be disposed of, for which a dealer at the HO will have to be contacted.
Purchase of shares under ‘Physical’ category shall also be not allowed at any branch offices. However, in case any client wants to sell such shares held under demat form, the same can be entertained.
Since most of the clients are having their BO Account with our DP, their Demat account also needs to be monitored on a regular basis in order to identify the ultimate owner / controller of the securities.
E] Record Keeping
- All records are to be maintained and kept in compliance to the SEBI Act, 1992, Rules and Regulations made there-under, PML Act, 2002 as well as other relevant legislation, Rules, Regulations, Exchange Bye-laws and circulars, etc. being issued by the relevant authorities.
- Records maintained should be sufficient enough to permit the reconstruction of any individual transaction, as and when necessary.
- For such reconstruction, the following information should be retained for the accounts of the clients in order to maintain a satisfactory audit trail;
- Beneficial Owner of the account
- Volume of funds and securities flowing through the account and
- For selected transactions;
- The origin of the funds and securities
- The form in which the funds were offered or withdrawn, e.g. cash, cheque, etc.
- The identity of the person undertaking the transaction
- The destination of the funds
- The form of instruction and authority.
F] Suspicious Transaction Identification and Reporting (STR)
Any transaction or a series of transactions that were done without having any economic rationale or bona fide purpose behind it or in an unusual or unjustified circumstance is said to be a Suspicious Transaction.
A list of few circumstances which may be in the nature of suspicious transactions is given below.
- Clients whose identity verification seems difficult or client appears not to co-operate.
- Asset management services for clients where the source of the funds is not clear or not in keeping with clients apparent standing /business activity.
- Clients in high-risk jurisdictions or clients introduced by banks or affiliates or other clients based in high risk jurisdictions.
- Large number of accounts having a common account holder/operator, introducer or authorised signatory with no rationale.
- Non-face to face client.
- Sudden activity in a Dormant account.
- Substantial increase in business turnover/volume without any apparent cause or reason.
- The transaction undertaken is inconsistent with the client’s income range/financial status/risk profile.
- Large volume transaction in various ‘Z’ group and/or ‘T’ group stocks.
- Off-market transfer to apparently unrelated third party account or multiple accounts.
- Off-market transfers in large quantity.
- Unusual transactions by Clients of Special Category (CSC) and Politically Exposed Persons (PEPs).
- Source of fund is unclear or details of the same are not made available.
- Fund transferred from multiple/various accounts for each transaction.
- Any activity in the account for which a satisfactory explanation is not received.
At times, though it may not seem to be suspicious in nature, transactions may have been undertaken to arouse some suspicion and thereby divert the attention from the actual deviant activity. Under such circumstance, transactions surrounding such above mentioned transaction should also be verified thoroughly. Sometimes, people with malicious intention would attempt to undertake a transaction and would abort it midway due to any reasons. Such failed attempts should also be verified and further details, if required, should be asked for from the concerned clients.
If suspicious transactions are observed, and after its subsequent verification, if any untoward matter has been unearthed from the verification, such activity should immediately be brought to the notice of the Principle Officer, who in turn will take up the matter suitably and inform the appropriate authority i.e. the Financial Intelligence Unit – India.
It is very important that suspicious transaction, if any, is emanating at our end, the same should be dealt with seriously and suitable action taken as per the requirement of PMLA 2002. Besides, though it is understandably difficult and beyond ones capacity, step should be taken to ensure that such transaction does not recur at out end.
Other directives/measures of PMLA and AML guidelines to be taken in consideration for preventing Money Laundering (ML) and Terrorist Financing (TF):
1] List of Designated Individuals & Entities
An updated list of individuals and entities which are subject to various sanction measures such as freezing of assets/accounts, denial of financial services etc., as approved by the Security Council Committee established pursuant to various United Nations' Security Council Resolutions (UNSCRs) can be accessed at its website at http://www.un.org/sc/committees/1267/consolist.shtml. Our employees ensure that accounts are not opened in the name of anyone whose name appears in said list. For that purpose the Company has started process for installation of software called “Analyser and Control – PMLA (SOS)” in the month of July 2019 to get alerts after filtering above mentioned lists provided by various authorities. It continuously scans all existing accounts to ensure that no account is held by or linked to any of the entities or individuals included in the list. Full details of accounts bearing resemblance with any of the individuals/entities in the list shall immediately be intimated to SEBI and FIU-IND.
2] Hiring of Employees
We have adequate screening procedures in place to ensure high standards when hiring employees. To identify the key positions within our organization structures regard to the risk of money laundering and terrorist financing and to ensure the employees taking up such key positions are suitable and competent to perform their duties.
3] Employees’ Training
We have an ongoing employee training programme so that the members of the staff are adequately trained in AML and CFT procedures. Training requirements have specific focuses for frontline staff, back office staff, compliance staff, risk management staff and staff dealing with new clients.
The above mentioned points are preliminary guideline for the policy. The relevance and usefulness of these guidelines will be reviewed and amendments made from time to time, as per the circulars issued by SEBI and FIU-India, in order to further strengthen the system.