Master Circular on AML/CFT

OFFICER ON SPECIAL DUTY INTEGRATED SURVEILLANCE DEPARTMENT 

EMAIL –  [email protected]

Tel : 022 26449450  Fax : 022 2644902

CIR/ISD/AML/3/2010                                                                December 31, 2010

To all Intermediaries registered with SEBI under Section 12 of the SEBI Act. (Through the stock exchanges for stock brokers and sub brokers, depositories for depository participants, AMFI for Asset Management Companies.)

Sub: Master Circular on AML/CFT

Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under.

Dear Sir / Madam,

1. The Prevention of Money Laundering Act, 2002 (PMLA)  was brought into force with effect from 1^st July 2005. Necessary Notifications / Rules under the said Act were published in the Gazette of India on July 01, 2005.

As  per  the  provisions  of  the  PMLA,  intermediary (includes a stockbroker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar  to  an   issue,  asset  management  company, depositary  participant,   merchant  banker,  underwriter, portfolio  manager,  investment  adviser  and  any  other intermediary associated with the  securities  market and registered  under  Section  12   of  the   Securities   and Exchange Board of India Act, 1992 (SEBI Act) shall have to  adhere  to  client  account  opening  procedures and maintain records of such transactions as prescribed by the PMLA and Rules notified there under

2. SEBI has issued necessary directives vide circulars, from time to time, covering issues related to Know Your Client (KYC) norms, Anti- Money Laundering (AML), Client Due Diligence (CDD) and Combating Financing of Terrorism (CFT). The directives lay down the minimum requirements  and  it  is  emphasized  that   the  intermediaries  may, according to their requirements, specify additional  disclosures to be made  by  clients  to  address  concerns  of  money  laundering   and suspicious transactions undertaken by clients.  Reference to applicable statutes and reporting guidelines for intermediaries is available at the website of the Financial Intelligence Unit – India (FIU-IND). Directives to all intermediaries under Section 12 of the SEBI Act are also issued in the context of compliance with the standards set by the Financial Action Task Force (FATF) on AML and CFT.

3.  List of  key  circulars/directives  issued  with  regard  to  KYC, CDD, AML and CFT

Following is a list of key circulars on KYC/CDD/AML/CFT issued by SEBI from 1993: 

4. This Master circular consolidates all the requirements/instructions issued by SEBI with regard to AML/CFT till January 31 2010 and supersedes the   earlier   circulars,  dated  September  01,  2009, December  19,  2008,  March   20,  2006  and  January  18,  2006 referenced  at  Nos.  (10,  11, 19  and  20)   respectively  of  the abovementioned  table.  This Master Circular is divided into two parts; the first part is an overview on the background and essential principles that concern combating money laundering (ML) and terrorist financing (TF).  The  second  part  provides  a  detailed  account  of  the procedures   and  obligations  to  be  followed  by  all  registered intermediaries to ensure compliance with AML/CFT  directives  This Circular is being issued to all the  intermediaries as specified at Para 2 above. The circular shall also apply to their branches and subsidiaries located abroad, especially, in countries which do not or insufficiently apply the FATF Recommendations, to the extent local laws   and  regulations  permit.  When local applicable laws and regulations   prohibit   implementation of these requirements, the same shall be brought to the notice of SEBI. In case there is a variance in CDD/AML standards prescribed by SEBI and the regulators of the host country, branches/overseas subsidiaries of intermediaries are required to adopt the more stringent requirements of the two.

5. This Master circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 (SEBI Act), and Rule 7 and Rule 9 of Prevention of Money-laundering (Maintenance  of  Records  of  the  Nature  and Value of  Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies,  Financial Institutions and Intermediaries) Rules, 2005 (PML Rules) to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

6. All the registered intermediaries are directed to ensure compliance with the  requirements  contained  in  this  Master  Circular  on  an immediate basis. Stock exchanges, Depositories and AMFI are also directed to bring the contents of this circular to the attention of their members/  depository  participants  and  verify  compliance  during inspections.

Yours faithfully,

Ramann

SEBI Master Circular on Anti Money Laundering (AML and Combating Financing of Terrorism (CFT)- Obligations of Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules Framed there-under

(Consolidated upto December 31, 2010)

PART – I OVERVIEW

1.  Introduction

1.1 The Directives as outlined below provide a general background and summary  of  the  main  provisions  of  the  applicable  anti-money laundering  and  anti-terrorist  financing  legislations  in  India.  They also provide guidance on the practical implications of the Prevention of Money Laundering Act, 2002 (PMLA). The Directives also  set   out  the  steps  that  a  registered  intermediary  or  its representatives shall implement to discourage and to identify any money  laundering or  terrorist  financing  activities. The relevance and usefulness of these Directives will be kept under review and it may be necessary to issue amendments from time to time.

1.2 These Directives are intended for use primarily by intermediaries registered under Section 12 of the Securities and Exchange Board of India Act, 1992  (SEBI Act). While it is recognized that a “one- sizefits-all”  approach  may  not  be  appropriate  for  the  securities industry in India, each registered intermediary shall consider the specific  nature  of  its  business,  organizational  structure,  type  of clients  and  transactions, etc. when  implementing the suggested measures  and  procedures  to  ensure  that  they   are  effectively applied.  The  overriding  principle  is  that  they  shall  be  able  to satisfy themselves that the measures taken by them are adequate, appropriate and abide by the spirit of such measures and the requirements as enshrined in the PMLA.

2.  Back Ground

The PMLA came into effect from 1^st July 2005. Necessary Notifications / Rules under the said Act were published in the Gazette of India on 1^st July, 2005 by the Department of Revenue, Ministry of Finance, Government of India. The  PMLA has  been further amended  vide  notification  dated March 6, 2009 and inter  alia provides that violating the prohibitions on manipulative  and  deceptive  devices,  insider  trading and  substantial acquisition of securities or control as prescribed in Section 12 A read  with Section 24 of the Securities and Exchange Board of India Act, 1992 (SEBI Act) will now be treated as a scheduled offence under schedule B of the PMLA.

As per the provisions of the PMLA, 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 SEBI Act ,   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:

ˆ All cash transactions of the value of more than Rs 10 lakh or its equivalent in foreign currency.

ˆ 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.

ˆ 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.

It may, however, be clarified that for the purpose of suspicious transactions reporting, apart from ‘transactions integrally connected’,  ‘transactions  remotely  connected  or  related’  shall also be considered.

In case there is a variance in CDD/AML standards prescribed by SEBI and the regulators of the host country, branches/overseas subsidiaries of intermediaries are required to adopt the more stringent requirements of the two.

3.1 Essential Principles

3.1.1  These Directives have taken into account the requirements of the  PMLA as applicable to the intermediaries registered under Section 12 of the SEBI Act. The detailed Directives in Part II have outlined relevant  measures and procedures to guide  the  registered  intermediaries  in  preventing ML and TF. Some of these suggested measures and procedures may not be applicable in every circumstance. Each intermediary shall consider carefully the specific  nature of its business, organizational structure, type of client and  transaction, etc. to satisfy itself that the measures taken by it are  adequate and appropriate and follow the spirit of the suggested measures in Part II and the requirements as laid down in the PMLA.

3.2  Obligation to establish policies and procedures

3.2.1  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 and  terrorist  financing.  The  PMLA  is  in  line  with  these  measures and mandates that all  intermediaries ensure the fulfillment of the aforementioned obligations.

3.2.2  To  be  in  compliance  with  these  obligations,  the senior management  of  a  registered  intermediary  shall  be  fully committed to establishing appropriate policies  and procedures  for  the  prevention  of  ML  and TF  and  ensuring  their  effectiveness  and compliance  with all relevant legal and regulatory requirements. The Registered Intermediaries shall:

• issue a statement of policies and procedures, on a group basis where applicable, for dealing with ML and TF reflecting the current statutory and regulatory requirements;
• ensure that the content of these Directives are understood by all staff members;
• regularly review the  policies  and  procedures  on the prevention of ML and TF to ensure their effectiveness. Further, in order to ensure the effectiveness of policies and procedures,  the  person doing such a review shall be different from the one who has framed such policies and procedures;
• adopt client acceptance policies and procedures which are sensitive to the risk of ML and TF;
• undertake client due diligence (“CDD”) measures to an extent that  is sensitive to the risk of ML and TF depending on the type of client, business relationship or transaction;
• have a system in place for identifying, monitoring and reporting suspected ML or TF transactions to the law enforcement authorities; and
• develop staff  members’  awareness  and  vigilance  to guard against ML and TF 

3.2.3    Policies  and  procedures  to  combat ML  shall cover:

• Communication of group policies  relating to prevention of ML and TF to all management and relevant staff that handle account information, securities transactions, money and client records etc. whether in branches, departments or subsidiaries;
• Client acceptance  policy  and  client  due  diligence measures, including requirements for proper identification;
• Maintenance of records;
• Compliance    with     relevant           statutory          and      regulatory      requirements;
• Co-operation with the  relevant  law  enforcement authorities, including the timely disclosure of information; and
• Role of  internal  audit  or  compliance  function  to ensure  compliance  with  the  policies,  procedures, and  controls  relating  to  the  prevention  of ML and TF,  including  the testing of the system for detecting suspected money laundering  transactions,  evaluating  and  checking the  adequacy  of  exception  reports  generated  on large  and/or  irregular  transactions,  the  quality  of reporting of suspicious transactions and the level of awareness of front line staff, of their responsibilities in this regard. The internal audit function shall be independent, adequately resourced and commensurate with  the  size  of the  business  and  operations,  organization structure, number of clients and other such factors.

4.  Written Anti Money Laundering Procedures

4.1    Each registered intermediary shall adopt written procedures to   implement  the anti money laundering provisions as envisaged under the PMLA. Such procedures shall 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).

5.  Client Due Diligence

5.1       The CDD measures comprise the following: 

• Obtaining sufficient information in order to identify persons who beneficially own or control the securities account. Whenever it is apparent that the securities acquired or maintained through an account are beneficially owned by a party other than the client, that party shall be identified using client identification and  verification    The  beneficial   owner  is  the natural  person  or  persons  who  ultimately  own,  control  or influence a client and/or persons onwhose behalf a transaction is being  conducted.  It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.
• Verify the client’s identity using reliable, independent source documents, data or information;
• Identify beneficial ownership and control, i.e. determine which individual(s) ultimately own(s) or control(s) the client and/or the person on whose behalf a transaction is being conducted;
• Verify the identity of the beneficial owner of the client and/or the person on  whose  behalf  a  transaction  is  being  conducted, corroborating the information provided in relation to (c);
• Understand the ownership and control structure of the client;
• Conduct ongoing due diligence and scrutiny, i.e. Perform ongoing scrutiny of the transactions and account throughout the course of the business relationship to ensure that the transactions being conducted are consistent with the registered intermediary’s knowledge of the client, its business and risk profile, taking into account, where necessary, the client’s source of funds; and
• Registered intermediaries shall periodically update all  documents,  data  or  information  of  all  clients  and  beneficial owners collected under the CDD process.

5.2 Policy for acceptance of clients:

5.2.1  All registered intermediaries shall develop client acceptance policies and procedures that aim to identify the types of clients that are likely to pose a higher than average risk of ML or TF. By establishing such policies and procedures, they will be in a better position to  apply  client  due  diligence  on  a  risk   sensitive  basis depending  on  the  type  of  client  business  relationship  or transaction. In a nutshell, the following safeguards are to be followed while accepting the clients:

• No account is opened in a fictitious / benami name or on an anonymous basis.
• Factors of risk perception (in terms of monitoring suspicious transactions) of the client are clearly defined having regard to clients’ location (registered office address, correspondence addresses and other addresses if   applicable), nature of business activity, trading turnover etc. and manner of making payment for transactions undertaken.  The parameters shall enable classification of clients into low, medium and high risk. Clients  of  special  category  (as  given  below)  may,  if necessary,  be  classified  even    Such clients require higher degree of due diligence and regular update of Know Your Client (KYC) profile.
• Documentation requirements and other information to be collected in respect of different classes of clients depending on the perceived risk and having regard to the requirements of Rule 9 of the PML Rules, Directives and Circulars issued by SEBI from time to time.
• Ensure that  an  account  is  not  opened  where  the intermediary is unable to  apply appropriate CDD measures  /  KYC policies.  This shall   applicable in cases where it is not possible to ascertain the identity of the client, or the information provided to the intermediary is suspected to be  non genuine, or there is perceived non  co-operation  of  the   client  in  providing  full  and complete  information.  The market intermediary shall not continue to do business with such a person and file a suspicious activity report. It shall also evaluate whether there  is  suspicious  trading  in  determining  whether  to freeze  or  close  the  account.  The  market  intermediary shall  be  cautious  to  ensure  that  it  does  not  return securities of money that may be from suspicious trades. However, the market intermediary shall consult the relevant authorities in determining what action it shall take when it suspects suspicious trading.
• The circumstances under which the client is permitted to act on behalf of another person / entity shall be clearly laid down. It shall be specified in what manner the account shall  be  operated,  transaction  limits  for  the operation, additional authority  required for transactions exceeding a specified quantity/value and other appropriate details.  Further the rights and responsibilities of both the persons i.e. the agent- client registered with the intermediary, as well as the person on whose behalf the agent is acting shall be clearly laid down. Adequate verification of a person’s authority to act on behalf of the client shall also be carried out.
• Necessary checks  and  balance  to  be  put  into  place before  opening  an  account  so  as  to  ensure  that  the identity  of  the  client  does  not  match  with  any  person having known criminal  background or is not banned in any other manner, whether in  terms of criminal or civil proceedings by any enforcement agency worldwide.
• The CDD  process  shall necessarily be revisited when there are suspicions of money laundering or financing of terrorism (ML/FT).

5.3.1  It is generally recognized that certain clients may be of a higher or  lower risk category depending on the circumstances such as  the client’s background, type of business relationship  or   transaction  etc.  As such, the registered intermediaries shall apply each of the client due diligence measures on a risk sensitive basis.  The basic principle enshrined in this approach is that the registered intermediaries shall adopt an enhanced client due diligence process for higher risk categories of clients. Conversely, a simplified client due diligence process may be adopted for lower risk categories of clients. In line with the risk-based approach, the type and amount of identification information and documents that registered intermediaries shall obtain necessarily depend on the risk category of a particular client. 

Further, low risk provisions shall not apply when there are suspicions of ML/FT or when other factors give rise to a belief that the customer does not in fact pose a low risk.

Such clients include the following- 

i. Non resident clients

ii.   High net-worth clients, 

iii. Trust, Charities, Non-Governmental Organizations (NGOs) and organizations receiving donations

iv. Companies having close family shareholdings or beneficial ownership

v. Politically Exposed Persons (PEP) are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States  or  of   Governments,  senior  politicians,  senior government/judicial/military   officers,  senior  executives  of state-owned corporations, important  political party officials, etc. The additional norms applicable to PEP as contained in the subsequent para  5 of this circular shall also be applied to the accounts of the family members or close relatives of PEPs.

vi. Companies offering foreign exchange offerings

vii. Clients in high risk countries where existence / effectiveness of money  laundering  controls  is  suspect,  where  there  is unusual  banking   secrecy,  countries  active  in  narcotics production, countries where corruption (as per Transparency International Corruption Perception Index) is highly prevalent, countries against which government sanctions are applied,  countries  reputed  to  be  any  of  the  following  – Havens/ sponsors of international terrorism, offshore financial centers, tax havens, countries where fraud is highly prevalent. While dealing with clients in high risk countries where the existence/effectiveness of money laundering control is suspect, intermediaries apart  from  being guided by the Financial Action Task Force (FATF) statements that identify countries that do not or insufficiently apply the FATF Recommendations,  published  by   the   FATF  on  its  website (www.fatf- gafi.org), shall also independently access and consider other publicly available information. viii. Non face to face clients

viii. Clients with dubious  reputation  as  per  public  information available etc.

The above mentioned list is only illustrative and the intermediary shall exercise  independent  judgment  to  ascertain  whether  any  other  set  of clients shall be classified as CSC or not. 

5.5 The KYC policy shall clearly spell out the client identification procedure  to  be  carried  out  at  different  stages  i.e.  while establishing  the   intermediary  –  client  relationship,  while carrying out transactions for the client or when the intermediary  has   doubts  regarding  the  veracity  or  the adequacy of previously obtained client identification data.

Intermediaries  shall  be  in  compliance  with  the  following requirements  while  putting  in  place  a  Client  Identification Procedure (CIP):

• All registered intermediaries shall proactively put in place appropriate risk management systems to determine whether their client or potential client or the beneficial owner of such client is a politically exposed person. Such procedures shall include seeking relevant information from the client, referring to publicly available information or accessing the commercial electronic databases of PEPS. Further, the enhanced CDD measures as outlined in clause 5.5 shall also be applicable where the beneficial owner of a client is a PEP.
• All registered intermediaries are required to obtain senior management approval      for       establishing     business relationships with PEPs. Where a client has been accepted and the  client or beneficial owner is subsequently found to be, or subsequently becomes a PEP, registered intermediaries shall obtain senior management approval to continue the business relationship.
• Registered intermediaries shall also take reasonable measures to verify the sources of funds as well as the wealth of clients and beneficial owners identified as PEP”.
• The client shall be identified by the intermediary by using reliable sources  including  documents  /  The intermediary shall obtain adequate information  to satisfactorily establish the identity of each new client and the purpose of the intended nature of the relationship.
• The information  must  be  adequate  enough  to  satisfy competent  authorities (regulatory / enforcement authorities) in future that due diligence was observed by the intermediary in compliance with the  Each original document shall be seen prior to acceptance of a copy.
• Failure by prospective client to provide satisfactory evidence of identity shall be noted and reported to the higher authority within the intermediary

5.5.1 SEBI has prescribed the minimum requirements relating to KYC for  certain  classes of registered  intermediaries  from time to time as detailed in the table. Taking into account the basic principles enshrined  in the KYC norms which have already  been  prescribed  or  which  may  be  prescribed  by SEBI from time to time, all registered intermediaries shall frame their own internal directives based on their experience in dealing with their clients and legal requirements as per the established practices. Further, the intermediary shall conduct ongoing due diligence  where it notices inconsistencies in the information provided. The underlying objective shall be to follow the requirements enshrined in  the   PMLA,  SEBI  Act  and  Regulations, directives  and circulars issued thereunder so that the intermediary is aware of the clients on whose behalf it is dealing.

5.5.2  Every  intermediary  shall  formulate  and  implement  a  CIP which shall incorporate the requirements of the PML Rules Notification No. 9/2005  dated July 01, 2005 (as amended from time to time), which notifies  rules for maintenance of records   of   the   nature   and   value  of   transactions, the procedure and manner of maintaining and time for furnishing of information and verification of records of the identity of the clients of the  banking companies, financial institutions and intermediaries of securities market and such other additional requirements  that  it  considers  appropriate  to  enable  it  to determine the true identity of  its  clients. PML Rules have recently been amended vide notification No. 13/2009 dated November 12, 2009 and need to be adhered to by registered intermediaries.

5.3   It may be noted that irrespective of the amount of investment made  by  clients, no  minimum  threshold  or  exemption  is available to registered  intermediaries (brokers, depository participants, AMCs etc.) from obtaining the minimum information/documents from clients as stipulated in the PML Rules/SEBI  Circulars  (as  amended  from   time  to  time) regarding the verification of the records of the identity  of clients. Further no exemption from carrying out CDD exists in  respect of any category of clients. In other words, there shall be no minimum investment threshold/ category-wise exemption available for carrying out CDD measures by registered intermediaries. This shall be strictly implemented by all intermediaries and non-compliance shall attract appropriate sanctions. 

6.1 Registered intermediaries shall ensure compliance with the record keeping requirements contained in the SEBI Act, 1992, Rules and Regulations made there-under, PMLA as well as other relevant legislation, Rules, Regulations, Exchange Bye-laws and Circulars.

6.2 Registered Intermediaries shall maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for prosecution of criminal behavior.

6.3 Shall there  be  any  suspected  drug  related  or  other laundered  money or terrorist  property, the competent investigating  authorities  would  need  to  trace  through  the audit trail for reconstructing a financial profile of the suspect account. To enable this reconstruction, registered intermediaries shall retain the following information for the accounts of their clients in order to maintain a  satisfactory audit trail:

(a) the beneficial owner of the account;

(b) the volume of the funds flowing through the account; and

(c) for selected transactions:

• the origin of the funds;
• the form  in  which  the  funds  were  offered  or withdrawn, e.g. cheques, demand drafts etc.
• the identity of the person undertaking the transaction;
• the destination of the funds;
• the form of instruction and authority.

6.4 Registered Intermediaries shall ensure that all client and transaction records and information are available on a timely basis to  the   competent  investigating    Where required  by the  investigating  authority, they  shall  retain certain records, e.g. client  identification, account files, and business  correspondence,  for  periods  which  may  exceed those  required under the SEBI Act, Rules and Regulations framed there-under PMLA, other relevant legislations, Rules and Regulations or Exchange bye-laws or circulars.

6.5 More specifically, all the intermediaries shall put in place a system of maintaining proper record of transactions prescribed under Rule 3 of PML Rules as mentioned below:

(i) all cash transactions of the value of more than rupees ten  lakh  or  its  equivalent  in  foreign currency;

(ii) 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 a month and the  aggregate value of such transactions exceeds rupees ten lakh;

(iii) all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place;

(iv) all suspicious transactions  whether  or  not made in  cash and by way of as mentioned in the Rules.

Intermediaries are required to maintain and preserve the following information in respect of transactions referred to in Rule 3 of PML Rules:

I. the nature of the transactions;

II. the amount of the transaction and the currency in which it is denominated;

III. the date on which the transaction was conducted; and

IV. the parties to the transaction.

8.1 Intermediaries shall take appropriate steps to evolve an internal mechanism for proper maintenance and preservation of such records and information in a manner that allows easy and quick retrieval of data as and when requested by the competent authorities. Further, the records mentioned in Rule 3 of PML  Rules have to be maintained and preserved for a period of ten years  from the date of transactions between the client and intermediary.

8.2 As stated in sub-section 5.5, intermediaries are required to formulate and implement the CI containing the requirements as laid down in Rule 9 of the PML Rules and such other additional requirements that it considers appropriate. The records of the identity of clients have to be maintained and preserved for a period of ten years from the date of cessation of transactions between the client and intermediary, i.e. the date of termination of an account or business relationship between the client and intermediary

8.3 Thus the following document retention terms shall be observed:

(a) All necessary records on transactions, both domestic and international, shall  be  maintained  at  least  for  the minimum  period prescribed under the relevant Act and Rules (PMLA and rules framed thereunder  as well SEBI Act)  and  other  legislations,  Regulations  or  exchange bye-laws or circulars.

(b) Records on client identification (e.g. copies or records of official identification documents like passports, identity cards, driving  licenses or similar documents), account files and business correspondence shall also be kept for the same period.

8.4 In situations where the records relate to on-going investigations or transactions which have been the subject of a  suspicious transaction reporting, they shall be retained until it is confirmed that the case has been closed.

9.1 Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures. This is possible only if the intermediary has an understanding of the normal activity of the client so that it can identify deviations in transactions / activities.

9.2 The intermediary shall pay special attention to all complex, unusually large transactions / patterns which appear to have no economic purpose. The intermediary may specify internal threshold limits for each class of client accounts and pay special attention to transactions which exceeds these limits. The background including all documents/office records /memorandums/clarifications sought pertaining to  such transactions and purpose thereof  shall  also  be  examined carefully  and findings shall be recorded in writing. Further such  findings,  records  and  related  documents  shall  be made available to auditors and also to SEBI/stock exchanges/FIUIND/other relevant Authorities, during audit, inspection  or  as  and  when  These records  are required to be preserved for ten years as is required under the PMLA.

9.3 The intermediary shall ensure a record of the transactions is preserved  and maintained in terms of Section 12 of the PMLA  and that transactions of a suspicious nature or any other transactions  notified under Section 12 of the Act are reported  to  the  Director, FIU-IND.  Suspicious  transactions shall also be regularly  reported to the higher authorities within the intermediary.

9.4 Further, the compliance  cell  of  the  intermediary  shall randomly examine a selection of transactions undertaken by clients to comment on their nature i.e. whether they are in the nature of suspicious transactions or not.

10.1 Intermediaries shall  ensure  that  appropriate  steps  are taken to  enable suspicious transactions to be recognized and  have  appropriate  procedures  for reporting  suspicious transactions.  While   determining  suspicious  transactions, intermediaries  shall  be   guided   by  the  definition  of  a suspicious transaction contained in PML Rules as amended from time to time.

10.2 A list  of  circumstances  which  may  be  in  the  nature  of suspicious  transactions  is  given    This  list  is  only illustrative and whether a particular transaction is suspicious or  not  will  depend  upon  the  background,  details  of  the transactions and other facts and circumstances:

10.3 Clients whose identity verification seems difficult or clients that appear not to cooperate

a) Asset management services for clients where the source of the funds is not clear or not in keeping with clients apparent standing /business activity;

b) Clients based in high risk jurisdictions;

c) Substantial increases in business      without            apparent cause;

d) Clients transferring large sums of money to or from overseas locations with instructions for payment in cash;

e) Attempted transfer of investment proceeds to apparently unrelated third parties;

f) Unusual transactions by CSCs and businesses undertaken by offshore banks/financial services, businesses reported to be in the nature of export- import of small items.

g) Any suspicious transaction shall be immediately notified to the Money Laundering Control Officer or any  other designated officer within the intermediary. The notification may be  done in the form of a detailed report with specific reference to the clients, transactions and the   nature /reason of suspicion. However, it  shall be ensured that there is continuity  in  dealing  with  the  client  as  normal  until  told otherwise and the client shall not be told of the report/suspicion. In exceptional circumstances, consent may not  be  given  to  continue  to  operate  the  account,  and transactions may be suspended, in one or more jurisdictions concerned  in  the  transaction,  or  other  action  taken.  The Principal Officer/Money Laundering Control Officer and other appropriate compliance, risk  management and related staff members shall have timely access to client identification data and CDD information, transaction records and other relevant information.

10.4 It is likely that in some cases transactions are abandoned or aborted by clients on being asked to give some details or to provide documents. It is clarified that intermediaries shall report all such attempted transactions in STRs, even if not completed by  clients,  irrespective  of  the  amount  of  the transaction.

10.5 Clause 5.4(vii) of this Master Circular categorizes clients of high risk countries, including countries where existence and effectiveness  of  money  laundering  controls  is  suspect  or which do  not  or  insufficiently  apply  FATF  standards,  as ‘CSC’. Intermediaries are directed that such clients shall also  be  subject  to  appropriate  counter  measures.  These measures  may   include  a  further  enhanced  scrutiny  of transactions,  enhanced  relevant  reporting  mechanisms  or systematic reporting of financial  transactions, and applying enhanced due diligence while expanding business relationships with the  identified country or persons in that country etc.

11. 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. Registered intermediaries are directed to ensure that accounts are not opened in the name of anyone whose name appears in said list.  Registered intermediaries shall continuously scan 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.

12. Procedure for freezing of funds, financial assets or economic resources or related services

Section 51A, of the Unlawful Activities (Prevention) Act, 1967 (UAPA), relating  to  the  purpose  of  prevention  of,  and  for  coping  with  terrorist activities was brought into effect through UAPA Amendment Act, 2008. In this regard, the Central Government  has  issued an Order dated August 27, 2009 detailing the procedure for the implementation of Section 51A of the UAPA.  Under the aforementioned Section, the Central Government  is empowered to freeze, seize or attach funds and other financial assets or economic  resources  held  by,  on  behalf  of,  or  at  the  direction  of  the individuals or entities listed in the Schedule to  the Order, or any other person  engaged  in  or  suspected  to  be  engaged  in  terrorism. The Government is also further empowered to prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.  The obligations to be followed by intermediaries to ensure the effective and expeditious implementation of  said Order has been  issued  vide  SEBI  Circular  ref.  no:  ISD/AML/CIR-2/2009   dated October 23, 2009, which needs to be complied with scrupulously.

13.1 In terms of the PML Rules, intermediaries are required to report information relating to cash and suspicious transactions to the Director, Financial Intelligence Unit-India (FIU-IND) at the following address:

Director, FIU-IND,

Financial Intelligence Unit-India,

6^th Floor, Hotel Samrat,

Chanakyapuri, New Delhi-110021.

Website:  http://fiuindia.gov.in

13.2 Intermediaries shall carefully go through all the reporting requirements and formats enclosed with this circular. These requirements and formats are divided into two parts- Manual Formats and Electronic Formats. Details of these formats are given in the  documents  (Cash  Transaction  Report- version 1.0 and  Suspicious Transactions Report version 1.0) which are also enclosed with this circular. These documents contain detailed directives  on the compilation and manner/procedure  of  submission  of  the  manual/electronic reports  to  FIU-IND. The  related  hardware  and  technical requirement for preparing reports in  manual/electronic format, the related data files and data structures thereof are also detailed in these documents. Intermediaries, which are not in a position to immediately file electronic reports, may file  manual   reports  with  FIU-IND  as   per   the   formats prescribed.  While detailed instructions for filing all types of reports  are  given  in  the  instructions  part  of  the  related formats, intermediaries shall adhere to the following:

(a) The Cash Transaction Report (CTR) (wherever applicable) for each month shall be submitted to FIU-IND by 15^th of the succeeding month.

(b) The Suspicious  Transaction  Report  (STR)  shall  be submitted within 7 days of arriving at a conclusion that any transaction,  whether  cash  or  non-cash,  or  a  series  of transactions integrally connected are of suspicious nature. The Principal Officer shall record his reasons for treating any transaction or a series of transactions as suspicious. It  shall be ensured that there is no undue delay in arriving at such a conclusion.

(c) The Principal Officer will be responsible for timely submission of CTR and STR to  FIU-IND;

(d) Utmost confidentiality shall be maintained in filing of CTR and STR to  FIU-IND. The reports may be transmitted by speed/registered post/fax at the notified address.

(d) No nil reporting needs to be made to FIU-IND in case there are no cash/suspicious transactions to be reported.

13.3 Intermediaries shall not put any restrictions on operations in the accounts where an STR has been made. Intermediaries and  their directors, officers and employees (permanent and temporary) shall be prohibited from disclosing  (“tipping  off”)  the  fact  that  a  STR  or  related information is being reported or provided to the  FIU-IND. This prohibition on tipping off extends not only to the filing of the STR and/or related information but even before, during and after the submission of an STR. Thus, it shall be ensured that there is no tipping off to the client  at any level.

It is clarified that the registered intermediaries,  irrespective  of  the  amount  of  transaction and/or the  threshold limit envisaged for predicate offences specified in part B of  Schedule of PMLA, 2002, shall file STR if they have reasonable  grounds to believe that the transactions involve proceeds of crime. 

14.        Designation of an officer for reporting of suspicious transactions

14.1 To ensure  that  the registered intermediaries properly discharge their legal  obligations  to report suspicious transactions to the authorities, the Principal Officer would act as a central reference point in facilitating onward reporting of suspicious transactions and for playing an active role in the identification and assessment of potentially suspicious transactions and shall have access to and be able to report to  senior  management  at  the  next  reporting  level  or  the Board  of  Directors.  Names,   designation  and  addresses (including email addresses) of ‘Principal  Officer’ including any changes therein shall also be intimated to the Office of the Director-FIU. As a matter of principle, it is advisable that the ‘Principal Officer’ is of a sufficiently senior position and is able  to  discharge  the  functions  with  independence  and authority.

The registered intermediaries shall have adequate screening procedures in place to ensure high standards when hiring employees. They shall identify the key positions within their own organization structures having regard to the risk of money laundering and terrorist financing and the size of their business and ensure the employees taking up such key positions are suitable and competent to perform their duties.

Intermediaries must have an ongoing employee training programme so that the members of the staff are adequately trained in AML and  CFT procedures. Training requirements shall have specific  focuses  for  frontline  staff,  back  office  staff,  compliance staff, risk management staff and staff dealing with new clients. It is crucial  that  all  those  concerned  fully  understand  the  rationale behind these directives,  obligations and requirements, implement them consistently and are sensitive  to  the risks of their systems being misused by unscrupulous elements.

Implementation of AML/CFT measures requires intermediaries to demand   certain  information  from  investors  which  may  be  of personal  nature  or   has  hitherto  never  been  called  for.  Such information  can  include documents evidencing source of funds/income  tax returns/bank records  etc. This  can sometimes lead to raising of questions by the client with regard to the motive and purpose of collecting such information. There is, therefore, a need for  intermediaries  to  sensitize their clients about these requirements as the ones emanating from AML and CFT framework. Intermediaries shall prepare specific literature/ pamphlets etc. so as to educate the client of the objectives of the AML/CFT programme.

List of various reports and their formats

1. Cash Transaction Report Version 1.0 (Guidance Note)
2. Summary of cash transaction report for an intermediary
3. Cash Transaction Report for an Intermediary
4. Annexure A- Individual data sheet for an intermediary
5. Annexure B- Legal person/Entity detail sheet for an intermediary
6. Suspicious Transaction Report Version 1.0 (Guidance Note)
7. Suspicious Transaction Report for an intermediary
8. Annexure A- Individual Detail Sheet for an intermediary
9. Annexure B- Legal Person/ Entity Detail Sheet for an intermediary
10. Annexure C- Account Detail Sheet for an intermediary