Provisions of Prevention of Money Laundering Act, 2002
Prevention of Money Laundering Act, 2002 (PMLA) forms the core of legal framework put in place by India to combat money laundering and related crimes. PMLA and the Rules notified there under came into force from 1st July, 2005. Under PMLA, all the entities registered with SEBI are required to furnish information of all suspicious transactions whether or not made in cash to FIU-IND. Under Section 3 of PMLA, projecting of crime as untainted property is an offence of money laundering liable to punishment 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.
Financial Intelligence Unit-India (FIU-IND) is the central national agency of India responsible for receiving, processing, analyzing and disseminating information of suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in combating money laundering and related crimes.
Section 2 (1) (g) of PMLA Rules defines suspicious 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; or
- Gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism.
Policy and Procedures for Anti Money Laundering Measures
The policy and procedures as outlined below provide a general background on the subjects of money laundering and terrorist financing, summarize the main provisions of the applicable anti-money laundering and anti-terrorist financing legislation in India and provide guidance on the practical implications of the Act. The same also sets out the steps that a registered intermediary and any of its representatives should implement to discourage and identify any money laundering or terrorist financing activities.
The Prevention of Money Laundering Act, 2002 has come into effect from 1st July 2005. Necessary Notifications / Rules under the said Act have been published in the Gazette of India on 1st July 2005 by the Department of Revenue, Ministry of Finance, Government of India.
As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include:
- All cash transactions of the value of more than Rs 10 lacs or its equivalent in foreign currency.
- All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs 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 and including, inter-alia, credits or debits into/from any non-monetary account such as demat account, security account maintained by the registered intermediary.
We should adopt written procedures to implement the anti-money laundering provisions as envisaged under the Anti Money Laundering Act, 2002. Such procedures should include inter alia, the following three specific parameters which are related to the overall Client Due Diligence Process:
- Policy for acceptance of clients
- Procedure for identifying the clients
- Transaction monitoring and reporting especially Suspicious Transactions Reporting (STR)
Client Due Diligence Process
The customer due diligence (“CDD”) measures comprise the following:
a. Obtaining sufficient information in order to identify persons who beneficially own or control securities account.
As an organization providing Research Analyst Services, details of securities account of clients are not shared with us in the process of delivering services and execution services are not part of our service package. Accordingly, identifying the beneficial owner or controlling party of the securities account of the client is the responsibility of the broker handling the security account of the client.
b. Verify the customer’s identity
Since Research Analyst regulation does not envisage KYC of the clients, basic KYC detail i.e., PAN card number to establish identity of the client is to be collected from the clients. KYC status of the clients is to be verified using the prescribed KRA portals.
c. Identify beneficial ownership and control
Transaction data is not handled by us as the client does not share such data with us as part of our research service. We provide non-discretionary research recommendation service, execution of which is at the discretion of the client and handled by the client themselves. Accordingly, identifying the beneficial owner or controlling party of the securities account of the client is the responsibility of the broker handling the security account of the client.
a. Policy for Acceptance of Clients
- No account is opened in a fictitious / benami name or on an anonymous basis.
- Ensure that an account is not opened where appropriate client due diligence measures / basic KYC details i.e., PAN card number cannot be collected.
- Ensure that the client is KYC registered.
- The client should not be permitted to act on behalf of another person / entity for service delivery.
- Do not accept clients whose identity matches with banned persons/entities as per SEBI/Stock Exchanges in capital market.
- Conduct risk assessment taking into account updated lists of individuals and entities subjected to sanction measures under United Nations Security Council Resolutions. Do not onboard a client who is present in such lists.
b. Procedure for Identifying the Clients
The client identification procedure is to be carried out at the time of establishing the client relationship i.e., onboarding the client. Basic KYC detail i.e., PAN card number of the client is to be collected to establish identity.
Failure by a prospective client to provide satisfactory evidence of identity should be noted and reported to higher authority and services should not be started for such client.
c. Maintenance of Record
All the records of the clients are to be maintained for a minimum period of 10 years or in case of any regulatory action till the time the same is resolved.
d. Audit
Audit of Research Analyst activities to be done by an independent professional as allowed by regulation. Any observations of audit to be taken on priority basis and corrective actions to be initiated.
e. Transaction Monitoring and Reporting (STR)
The only transaction encountered while delivering the service is collection of fees as execution data of clients is not accessed. Fee collection should be through bank account only and no cash transaction should be allowed for fee payment by clients.
The nature and value of transactions prescribed under the PMLA Rules to maintain and record includes:
- All cash transactions of the value of more than Rs 10 lacs or its equivalent in foreign currency.
- All series of cash transactions integrally connected to each other valued below Rs 10 lakhs within one calendar month.
- All suspicious transactions whether or not made in cash including credits or debits into/from any non-monetary account.
Any suspicious transactions will be immediately notified to the Compliance Officer in the form of a detailed report with specific references to the clients, transactions and the nature/reason of suspicion. Compliance staff will have timely access to customer identification data, CDD information, transaction records and other relevant information.
The Principal Officer will be responsible for timely submission of CTR and STR to FIU-IND. Utmost confidentiality will be maintained in filing of CTR and STR to FIU-IND. No nil reporting will be made in case there are no cash/suspicious transactions to be reported.
Reporting to FIU – India
In terms of the PMLA rules, reporting of information relating to cash and suspicious transactions shall be made to the Director, Financial Intelligence Unit – India (FIU-IND).
Role of Staff
Principal Officer
- Communicating the policy on prevention of Money Laundering to employees.
- Receiving reports from employees for any suspicious dealings noticed.
- Clarifying queries from employees.
- Ensuring adherence to AML guidelines.
- Reporting suspicious transactions to appropriate authorities.
- Handling compliance functions and ensuring compliance with AML and TF policies.
- Evaluating processes in case any gaps are identified.
On-Boarding Staff
- Primary responsibility of compliance during client interaction.
- Carrying out KYC / customer due diligence process during onboarding and renewal.
- Reporting any suspicious activity noticed.
Communication of Policy
Copy of the policy is to be provided to management and relevant staff handling account information, securities transactions, money and client records. An internal awareness session is to be conducted yearly in the first week of April.
Compliance with Statutory and Regulatory Requirements
All activities are to be carried out in compliance with relevant statutory and regulatory requirements.
Co-operation with Law Enforcement Authorities
Appropriate information of clients as maintained shall be shared with relevant law enforcement authorities as and when required, with timely disclosures as per regulatory requirements.
Review of Policy and Procedures
Management shall review the policies and procedures on prevention of Money Laundering and Terrorist Financing to ensure effectiveness whenever there is any change in regulatory guidelines.