SEBI Guidelines to Securities Market Intermediaries – Under the PMLA 2002

Swetha Dhinesh

01 Mar, 2023

Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism & Obligations of Securities Market Intermediaries under the PMLA, 2002 & Rules framed thereunder (Guidelines) have been updated by the SEBI in a circular dated 3 February 2023.

All market intermediaries registered with SEBI and listed on recognised Indian stock exchanges must follow the Rules. Concerning the Central Government’s authority under Section 51A of the Unlawful Activities (Prevention) Act of 1967^[1], the updated Guidelines have introduced a few significant additions and explanations to the prior SEBI Circular dated 15 October 2019 (now rescinded under this circular) and have incorporated elements from various notifications issued by the MHA (India) in recent years (UAPA).

Guidelines on Anti-Money Laundering Standards & Combating the Financing of Terrorism (FT) & Obligations of Securities Market Intermediaries under the PMLA, 2002.

All reporting entities must comply with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA), as well as any subsequent amendments that have been made and announced by the Government of India (which includes market intermediaries registered under section 12 of the SEBI Act, i.e. a stock-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, asset management company, depository participant, merchant banker, portfolio manager, investment adviser and any other intermediary associated with the securities market and registered under Section 12 of the SEBI Act and stock exchanges), shall follow the client account opening processes, record-keeping requirements, and reporting requirements outlined in the PMLA.

The Maintenance of Records Regulations provides SEBI with the authority to define the data that market intermediaries must preserve as well as the process, methodology, and format in which it must be maintained. Additionally, it requires the reporting entities to develop an internal system that will consider any regulations issued by the regulator to identify the transactions listed in the Maintenance of Records Rules and provide information about them in the format that SEBI may specify.

As stated in Section 12A, read with Section 24 of the SEBI Act, breaking the prohibitions on manipulative and deceptive methods, insider trading, and substantial acquisition of securities or control would be handled as a scheduled offence under Schedule B of the PMLA.

Revised Guidelines

The following are the revised Guidelines’ main ideas and modifications:

Policy for Registered Intermediaries and Stock Exchanges Regarding Client Acceptance:

• For clients in the special category (CSC), increased client due diligence has been mandated, and “Non-Face-To-Face clients” have been defined as “clients who open accounts without visiting the branch or offices of registered market intermediaries or meeting the officers of the registered market intermediaries.” On the other hand, it is made clear that the customer identification procedure via video would be treated as “face-to-face” client onboarding.
•  Registered intermediaries must make sure a client’s account is not opened until the intermediary has completed the client’s due diligence procedures. The intermediary must file a suspicious activity report whenever the client’s identity or the information they provided is thought to be false. Regrettably, the guidelines are vague as to whether such a report should be filed with SEBI or the FIU-IND.
•  The market intermediary is required to periodically assess the nature of its ongoing clients concerning such clients. If there are any questionable trades, the company will investigate, freeze the account, and stop doing business with the client.
• Only under specific conditions may registered intermediaries allow a client to act on behalf of another person/business. Although these scenarios aren’t explicitly stated in the Guidelines, it must be assumed that the same rule—that the other person or entity’s identity is capable of evaluation—will still be applicable.

Reliance on the third party for carrying out client due diligence

1. Previously, registered market intermediaries were allowed to rely on third parties for customer identification and verification. The Guidelines establish the following precautions to be followed by registered intermediaries in accordance with rule 9(2) of the Prevention of Money Laundering (Maintenance of Records) Rules 2005 (PMLA Rules):
   • Ensure the third party is regulated, supervised, or monitored and has measures in place to comply with client due diligence and record-keeping.  
   • It is not located in any nation or jurisdiction that the Financial Action Task Force has classified as a high-risk jurisdiction.
   • The third party should also immediately send all client due diligence details of the client to the registered intermediary (FATF).
2. The registered intermediary will ultimately be in charge of the client’s due diligence.
3. The intermediary must keep a record of all cash transactions worth more than Rs.10 lakhs or its equivalent in foreign currency, as well as any series of transactions that are directly or indirectly related and have a combined value greater than Rs.10 lakhs. Moreover, debits and credits to or from non-financial accounts must be recorded, and suspicious transaction reports must be filed when necessary.

List of designated individuals or organisations

• In accordance with Section 35(1) of the UAPA, registered market intermediaries are obligated to keep track of the Ministry of Home Affairs (MHA) most recent lists of individuals who have been labelled “terrorists.”
• All directives issued by SEBI periodically regarding finances, financial assets, economic resources, or associated services under sections 35 (1) and 51A of the UAPA shall be taken note of for compliance.
• In accordance with Section 35(1) of the UAPA, stock exchanges and registered market intermediaries must submit a Suspicious Transaction Report (STR) to the Financial Intelligence Unit of India (FIU-IND) covering all transactions.
• The UAPA Nodal Officer of the State or Union Territory where the account is held must simultaneously receive a copy of the STR and any communications with the FIU-IND.

Registered market intermediaries are instructed to take precautions to prevent accounts from being established in the names of those whose names appear on said list. In order to make sure that no accounts are owned by or connected to any of the organisations or people on the list, registered market intermediaries must constantly scan all active accounts.

The designated individuals/entities shall not hold any funds, financial assets, economic resources, or related services held in the form of securities with the Stock Exchanges or the registered intermediaries unless the Stock Exchanges and the registered intermediaries maintain updated designated lists in electronic form and periodically conduct checks on the specified parameters.

Jurisdictions that do not/insufficiently apply the Financial Action Task Force Recommendations

Following the completion of each of its plenaries, the FATF Secretariat issues statements to the public and intensifies monitoring of countries to address strategic flaws in their policies and procedures for preventing money laundering, terrorist financing, and proliferation funding risks. In this regard, registered intermediaries must take into account FATF Statements that SEBI periodically distributes as well as publicly available data to identify nations that do not or insufficiently implement the FATF Guidelines.

The risks associated with the AML/CFT regime shortcomings of the countries included in the FATF Statements must be considered by the registered intermediaries. It should be stressed, nonetheless, that regulated firms are not prohibited from engaging in lawful commercial or economic relations with the nations and jurisdictions named in the FATF pronouncements.

Reporting to Financial Intelligence Unit-India

According to the PML Regulations, registered market intermediaries must advise the Director Financial Intelligence Unit-India of information about cash and suspicious transactions (FIU-IND).

These publications also include information on the relevant hardware and technical requirements, related data files, and data formats for creating reports. Registered intermediaries must follow the following guidelines even though complete instructions for filing all types of reports are provided in the associated formats’ instructions section:

• When relevant, the Cash Transaction Report (CTR) for each month must be submitted to FIU-IND by the 15th of the succeeding month.
• When a cash or non-cash transaction, or a string of closely related transactions, is determined to be suspicious, the Suspicious Transaction Report (STR) must be filed within seven days. Any time the principal Officer views a transaction or series of transactions as suspicious, he must document his reasoning. It must be guaranteed that such a determination is reached without undue delay.
• By the fifteenth day of the succeeding month, each Non-Profit Organization Transaction Report (OTR) must be sent to FIU-IND.
• The Principal Officer will be in charge of timely submitting CTR, STR, and NTR to FIU-IND; CTR, STR, and NTR filings to FIU-IND must be done with the utmost confidentiality.
• There is no need to notify FIU-IND if there are no cash, suspicious, or non-profit organisation transactions to report.

Conclusion

By including PMLA and UAPA clauses in these recommendations, SEBI is alerting registered intermediaries to the fact that violating these terms could result in harsh repercussions under Indian anti-corruption legislation. The required KYC rules must now be in place, and the registered intermediaries must make sure that the due diligence process is carried out appropriately for both low-risk and high-risk clients. However, the registered intermediaries may face a higher financial burden.

Also Read:
SEBI issues circular on terms of usage of market data
Regulatory Framework for Distribution of Capital Market Products & Services