OFFICER ON SPECIAL DUTY
INTEGRATED SURVEILLANCE DEPARTMENT
EMAIL — ramanns@sebi.gov.in
TEL : 022 26449450
Fax : 022 26449029
ISD/AML/CIR-1/2010
February 12, 2010

To all Intermediaries registered with SEBI under Section 12 of the
SEBI Act.

(Through the stock exchanges for stock brokers, sub brokers,
depositories for depository participants, AMFI for Asset Management

Companies.)

Sub: Anti Money Laundering (AML) Standards/Combating Financing
of Terrorism (CFT)/Obligations of Securities Market
Intermediaries under the Prevention of Money Laundering Act,
2002 and Rules framed there-under- Master Circular on
AMLI/CFT

Dear Sir / Madam,

1. The Prevention of Money Laundering Act, 2002 (PMLA) was
brought into force with effect from 1S! 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 , every banking
company, financial institution (includes chit fund
company, a co-operative bank, a housing finance

institution and a non-banking financial company) and

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2.

3.

intermediary (includes a stock-broker, 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

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 emphasised 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.

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:

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Circular No. Date of | Subject Broad area covered
circular
SEBI/MIRSD/Cir January 18, | Mandatory In-person verification done
No.02/2010 2010 Requirement of in- . _
eg: for opening _ beneficial
person verification of
clients. owner’s account by a DP
will hold good for opening
trading account for a stock
broker and vice versa, if
the DP and the stock
broker is the same entity or
if one of them is the
holding or _ subsidiary
company of the other.
SEBI / IMD / MC | January 01, | Master Circular for | Compliance with AML/CFT
No.1 /189241/ 2010 | 2010 Mutual Funds CDD directives of SEBI
stipulated in Master
Circular dated December
19, 2008
ISD/AML/CIR- October 23, | Directives on CFT Procedure to be followed
2/2009 2009 under Unlawful for the freezing of assets of
Activities
(Prevention) Act, individual or entities
1967 : :
engaged in terrorism
ISD/AML/CIR- September | Additional AML/ CFT | Additional AML/CFT
4/2009 01,2009 __| Obligations of requirements and
Intermediaries under
PMLA, 2002 and clarifications thereon
rules framed
thereunder
ISD/AML/CIR- December Master Circular on Framework for AML/CFT
1/2008 19, 2008 AMLICFT directives | including procedures for
CDD, client identification,
record keeping & retention,
monitoring and reporting of
STRs
MIRSD/DPS- July 2, | In-Person Responsibility of stock-
verification of clients

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II1/130466/2008 2008 by stock-brokers brokers to ensure __in-
person verification by its
own staff.

7 MRD/DoP/Cir- June 30, | Mandatory Exception for certain

20/2008 2008 Requirement of PAN classes of persons from
PAN being the sole
identification number for all
participants trading in the
securities market.

8 F.No.47/2006/ISD/S_ | April 4, | In-person In-person verification to be

R/122539 2008 verification of BO’S| cried out by staff of

when opening
demat accounts depository participant.

9 MRD/DoP/Cir- April 3, | Exemption from | Exemption for investors
Mandatory a .

20/2008 2008 requirement of PAN. residing in the State of
Sikkim from PAN being the
sole identification number
for trading in the securities
market.

10 | F.No.47- February In-Person clarification on various
2006/ISD/SR/11815 | 22,2008 __| Verification of clients | tonics relating to ‘in-
by depositories

3/2008 person’ verification of BOs
at the time of opening
demat accounts

11 MRD/DoP/Dep/Cir- | September | KYC Norms for | Proof of Identity (POI) and
Depositories

12/2007 7, 2007 Proof of Address (POA) for
opening a _ Beneficiary
Owner (BO) Account for
non-body corporates.

12 MRD/DoP/Cir- April 27, | PAN to be the sole Mandatory requirement of

05/2007 2007 identification number | Bani for _ participants

for all transactions in
the securities market | transacting in the
securities market.
13 ISD/CIR/RR/AML/2/ | March 20, | PMLA- Obligations | Procedure for maintaining
of intermediaries in

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06 2006 terms of Rules and preserving records,
notified there under reporting requirements
and formats of reporting
cash transactions and
suspicious transactions
14 ISD/CIR/RR/AML/1/ | January 18, | Directives on AML Framework for AML and
06 2006 Standards CFT including policies and
procedures, Client Due
Diligence requirements,
record keeping, retention,
monitoring and reporting
15 SEBI/MIRSD/DPS- | August 26, | Uniform Uniform KYC documentary
1/Cir-31/2004 2004 Documentary requirements for trading on
Requirements for | different segments and
trading exchanges
16 MRD/DoP/Dep/Cir- | August 24, | Proof of Identity | Broadening the list of
29/2004 2004 (POI) and Proof of | documents that may be
Address (POA) for | accepted as Proof of
opening a | Identity (POI) and/or Proof
Beneficiary Owner | of Address (POA) for the
(BO) Account for | purpose of opening a BO
non-body corporate | Account
17 SEBI/MRD/SE/Cir- August 27,|Mode of payment | Prohibition on
33/2003/27/08 2003 and delivery acceptance/giving of cash
by brokers and on third
party transfer of securities
18 SMDRP/Policy/Cir- | August 4,|KYC Norms _ for | Documentary requirements
36/2000 2000 Depositories for opening a beneficiary
account.
19 SMD/POLICY/CIRC_ | April 11, | Client Registration | Formats of client
ULARS/5-97 1997 Form Registration Form and
broker clients agreements
20 SMD-1/23341 Nov. 18, | Regulation of | Mandatory requirement to

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1993 transaction between | obtain details of clients by

clients and members | brokers.

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 S.Nos. (4, 5,13 and 14) 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 and terrorist
financing. 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 should 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

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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,

S. Ramann

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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 January 31, 2010)

PART- | OVERVIEW

1 Introduction
Background
Policies and Procedures to Combat Money Laundering and
Terrorist financing
3.1. Essential Principles

3.2 Obligations to establish policies and procedures

PART - Il DETAILED OBLIGATIONS

Written Anti Money Laundering Procedures
Client Due Diligence
5.1 Elements of Client Due Diligence
5.2 Policy for acceptance of clients
5.3 Risk Based Approach
5.4 Clients of special category (CSC)
5.5 Client identification procedure
Record Keeping

Information to be maintained

on oO

Retention of Records

9 Monitoring of transactions

10 Suspicious Transaction Monitoring & Reporting
11 List of Designated Individuals/Entities

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

13 Reports to Financial Intelligence Unit- India

14 Designation of an officer for reporting of suspicious transaction

15 Employees’ Hiring/Training and Investor Education

16 Annexure- List of various Reports and their formats

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PART -I OVERVIEW

1. Introduction

1.1The 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 should 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-
size-fits-all” approach may not be appropriate for the securities
industry in India, each registered intermediary should 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 should 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:

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The PMLA came into effect from 1%! July 2005. Necessary Notifications /
Rules under the said Act were published in the Gazette of India on 1° 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:

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

0 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.

0 All suspicious transactions whether or not made in cash and

including, inter-alia, credits or debits into from any non monetary

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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’ should

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.

. Policies and Procedures to Combat Money Laundering and

Terrorist financing

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 Il have outlined relevant measures and procedures to
guide the registered intermediaries in preventing money
laundering and terrorist financing. Some of these suggested
measures and procedures may not be applicable in every
circumstance. Each intermediary should 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.

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3.2 Obligation to establish policies and procedures

3.2.1

3.2.2

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.

To be in compliance with the these obligations, senior
management of a registered intermediary should be fully
committed to establishing appropriate policies and
procedures for the prevention of money laundering and
terrorist financing and ensuring their effectiveness and
compliance with all relevant legal and_ regulatory

requirements. The Registered Intermediaries should:

(a) issue a statement of policies and procedures, on a group
basis where applicable, for dealing with money
laundering and terrorist financing reflecting the current
statutory and regulatory requirements;

(b) ensure that the content of these Directives are
understood by all staff members;

(c) regularly review the policies and procedures on _ the
prevention of money laundering and terrorist financing to
ensure their effectiveness. Further, in order to ensure the

effectiveness of policies and procedures, the person

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doing such a review should be different from the one who
has framed such policies and procedures;

(d) adopt client acceptance policies and procedures which
are sensitive to the risk of money laundering and terrorist
financing;

(e) undertake client due diligence (“CDD”) measures to an
extent that is sensitive to the risk of money laundering
and terrorist financing depending on the type of client,
business relationship or transaction;

(f) have a system in place for identifying, monitoring and
reporting suspected money laundering or terrorist
financing transactions to the law enforcement authorities;
and

(g) develop staff members’ awareness and vigilance to

guard against money laundering and terrorist financing.

3.2.3 Policies and procedures to combat Money Laundering
should cover:

a. Communication of group policies relating to
prevention of money laundering and _ terrorist
financing to all management and relevant staff that
handle account information, securities transactions,
money and client records etc. whether in branches,
departments or subsidiaries;

b. Client acceptance policy and client due diligence
measures, including requirements for proper
identification;

c. Maintenance of records;

d. Compliance with relevant statutory and regulatory

requirements;

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e. Co-operation with the relevant law enforcement
authorities, including the timely disclosure of
information; and

f. Role of internal audit or compliance function to
ensure compliance with the policies, procedures,
and controls relating to the prevention of money
laundering and terrorist financing, 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.

PART -Il DETAILED DIRECTIVES

4. Written Anti Money Laundering Procedures

4.1 Each registered intermediary should adopt written procedures
to implement the anti money laundering provisions as
envisaged under the PMLA. Such procedures should include
inter alia, the following three specific parameters which are
related to the overall ‘Client Due Diligence Process’:

a. Policy for acceptance of clients

b. Procedure for identifying the clients

c. Transaction monitoring and reporting especially Suspicious
Transactions Reporting (STR)

5. Client Due Diligence

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5.1. The CDD measures comprise the following:

(a) 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 should be identified using client identification
and verification procedures. The beneficial owner is the
natural person or persons who ultimately own, control or
influence a client and/or persons on whose behalf a
transaction is being conducted. It also incorporates those
persons who exercise ultimate effective control over a legal

person or arrangement.

(b) Verify the client's identity using reliable, independent source

documents, data or information;

(c) 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;

(d) 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); and

(e) 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

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profile, taking into account, where necessary, the client’s source

of funds.

5.2 Policy for acceptance of clients:

5.2.1 All registered intermediaries should develop client acceptance

policies and procedures that aim to identify the types of

clients that are likely to pose a higher than the average risk

of money laundering or terrorist financing. 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:

a)

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 should enable
classification of clients into low, medium and high risk.
Clients of special category (as given below) may, if
necessary, be classified even higher. Such clients
require higher degree of due diligence and regular

update of Know Your Client (KYC) profile.

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c)

Documentation requirement and other information to be
collected in respect of different classes of clients
depending on 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 may be 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 should
not continue to do business with such a person and file a
suspicious activity report. It should also evaluate whether
there is suspicious trading in determining whether to
freeze or close the account. The market intermediary
should be cautious to ensure that it does not return
securities of money that may be from suspicious trades.
However, the market intermediary should consult the
relevant authorities in determining what action it should

take when it suspects suspicious trading.

The circumstances under which the client is permitted to
act on behalf of another person / entity should be clearly
laid down. It should be specified in what manner the
account should 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

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5.3

5.3.1

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 should be clearly laid down. Adequate
verification of a person’s authority to act on behalf of the

client should also be carried out.

f) 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.

Risk-based Approach

It is generally recognized that certain clients may be of a
higher or lower risk category depending on circumstances
such as the client's background, type of business
relationship or transaction etc. As such, the registered
intermediaries should 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 should 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
should obtain necessarily depend on the risk category of a

particular client.

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5.4

Clients of special category (CSC):

Such clients include the following-

vi.

vii.

Non resident clients

High net-worth clients,

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

Companies having close family shareholdings or beneficial
ownership

Politically Exposed Persons (PEP) Politically exposed
persons 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_ 5.5 of this circular shall also be applied
to the accounts of the family members or close relatives of
PEPs.

Companies offering foreign exchange offerings

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.

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viii. | Non face to face clients
ix. Clients with dubious reputation as per public information
available etc.
The above mentioned list is only illustrative and the intermediary should
exercise independent judgment to ascertain whether any other set of

clients should be classified as CSC or not.

5.5 Client identification procedure:

5.5 The KYC policy should 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):

a) All registered intermediaries should put in place necessary
procedures to determine whether their existing/potential
client is a PEP. Such procedures would include seeking
additional information from clients, accessing publicly
available information etc.

b) 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

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5.5.1

intermediaries shall obtain senior management approval to
continue the business relationship.
Registered intermediaries shall take reasonable measures to

verify source of funds of clients identified as PEP.

The client should be identified by the intermediary by using
reliable sources including documents / information. The
intermediary should obtain adequate information to
satisfactorily establish the identity of each new client and the

purpose of the intended nature of the relationship.

The information should be adequate enough to satisfy
competent authorities (regulatory / enforcement authorities)
in future that due diligence was observed by the intermediary
in compliance with the directives. Each original document

should be seen prior to acceptance of a copy.

Failure by prospective client to provide satisfactory evidence
of identity should be noted and reported to the higher

authority within the intermediary.

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 should
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 should
conduct ongoing due _ diligence where it notices

inconsistencies in the information provided. The underlying

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objective should 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.

5.5.3 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

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by all intermediaries and non-compliance shall attract

appropriate sanctions.

Record Keeping

6.1

6.2

6.3

Registered intermediaries should 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.

Registered Intermediaries should 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.

Should 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 should 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.;

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6.4

6.5

* the identity of the person undertaking the
transaction;
* the destination of the funds;

* the form of instruction and authority.

Registered Intermediaries should ensure that all client and
transaction records and information are available on a timely
basis to the competent investigating authorities. Where
required by the investigating authority, they should 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.

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

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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.

7. Information to be maintained

Intermediaries are required to maintain and preserve the following

information in respect of transactions referred to in Rule 3 of PML Rules:

|. the nature of the transactions;

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

I.

the date on which the transaction was
conducted; and

IV. the parties to the transaction.

8. Retention of Records

8.1

8.2

Intermediaries should 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.

As stated in sub-section 5.5, intermediaries are required to
formulate and implement the CIP containing the

requirements as laid down in Rule 9 of the PML Rules and

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8.3

8.4

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 the transactions between the client and

intermediary.

Thus the following document retention terms should be

observed:

(a) All necessary records on transactions, both domestic and
international, should 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 should also be kept

for the same period.

In situations where the records relate to on-going
investigations or transactions which have been the subject of
a suspicious transaction reporting, they should be retained

until it is confirmed that the case has been closed.

Monitoring of transactions

9.1

Regular monitoring of transactions is vital for ensuring

effectiveness of the AML procedures. This is possible only if

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9.2

9.3

9.4

the intermediary has an understanding of the normal activity
of the client so that it can identify deviations in transactions /

activities.

The intermediary should 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 should be
made available to auditors and also to SEBI /stock
exchanges/FIU-IND/other relevant Authorities, during audit,
inspection or as and when required. These records are
required to be preserved for ten years as is required under
PMLA.

The intermediary should 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
should also be regularly reported to the higher authorities

within the intermediary.

Further, the compliance cell of the intermediary should

randomly examine a selection of transactions undertaken by

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clients to comment on their nature i.e. whether they are in

the nature of suspicious transactions or not.

10. Suspicious Transaction Monitoring & Reporting

10.1. Intermediaries should ensure that appropriate steps are

taken to enable suspicious transactions to be recognised

and have appropriate procedures for reporting suspicious

transactions. While determining suspicious transactions,

intermediaries should 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 below. 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:

a)

b)

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

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 based in high risk jurisdictions;

Substantial increases in business without apparent
cause;

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

cash;

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

g) 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.

10.3 Any suspicious transaction should be immediately notified to

10.4

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 should be ensured that there is
continuity in dealing with the client as normal until told
otherwise and the client should 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

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 should
report all such attempted transactions in STRs, even if not
completed by clients, irrespective of the amount of the

transaction.

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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 should
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 should immediately be intimated to SEBI and
FIU-IND.

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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. Reporting to Financial Intelligence Unit-India

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" Floor, Hotel Samrat,

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13.2

(a)

(b)

Chanakyapuri,
New Delhi-110021.

Website: http://fiuindia.gov.in

Intermediaries should 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
[version 1.0 &nd 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 should adhere to the following:

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

The Suspicious Transaction Report (STR) should 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 should record his reasons for treating

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any transaction or a series of transactions as suspicious. It
should 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 should 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.

(e) No nil reporting needs to be made to FIU-IND in case there

are no cash/suspicious transactions to be reported.

13.3 Intermediaries should 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.
Thus, it should 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, should 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

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15.

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 e-mail addresses) of ‘Principal Officer’ including
any changes therein shall also be intimated to the Office of
the Director-FlU. 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.

Employees’ Hiring/Employee’s Training/ Investor Education

15.1 Hiring of Employees

The registered intermediaries should have adequate screening
procedures in place to ensure high standards when hiring
employees. They should 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.

15.2 Employees’ Training

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 should have

specific focuses for frontline staff, back office staff, compliance

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16.

ak won =

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.

15.3 Investors Education

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 should prepare specific literature/
pamphlets etc. so as to educate the client of the objectives of the
AML/CFT programme.

Annexure:

List of various reports and their formats

Cash Transaction Report Version 1.0 (Guidance Note)
Summary of cash transaction report for an intermediary
Cash Transaction Report for an Intermediary

Annexure A- Individual data sheet for an intermediary

Annexure B- Legal person/Entity detail sheet for an intermediary

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Suspicious Transaction Report Version 1.0 (Guidance Note)
Suspicious Transaction Report for an intermediary
Annexure A- Individual Detail Sheet for an intermediary

Annexure B- Legal Person/ Entity Detail Sheet for an intermediary

Ss P PN ©

0. Annexure C- Account Detail Sheet for an intermediary

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