MASTER CIRCULAR
SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022 February 03, 2023
To,
1. All Intermediaries registered with SEBI under Section 12 of the
Securities and Exchange Board of India Act, 1992
2. Stock Exchanges
Dear Sir/Madam,
Subject: Guidelines on Anti-Money Laundering (AML) Standards and Combating
the Financing of Terrorism (CFT) /Obligations of Securities Market
Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules
framed there under.
1. The Prevention of Money Laundering Act, 2002 (“PMLA”) and the Prevention of
Money-Laundering (Maintenance of Records) Rules, 2005 (Maintenance of
Records Rules1), as amended from time to time and notified by the Government of
India, mandate every reporting entity [which includes intermediaries registered
under section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI
Act) and stock exchanges], to adhere to client account opening procedures,
maintain records and report such transactions as prescribed therein to the relevant
authorities. The Maintenance of Records Rules, inter alia, empower SEBI to
specify the information required to be maintained by the intermediaries and the
procedure, manner and the form in which such information is to be maintained. It
also mandates the reporting entities to evolve an internal mechanism having
regard to any guidelines issued by regulator for detecting the transactions specified
in the Maintenance of Records Rules and for furnishing information thereof, in such
form as may be directed by the regulator.
2. The enclosed guidelines stipulate the essential principles for combating Money
Laundering (ML) and Terrorist Financing (TF) and provides detailed procedures
and obligations to be followed and complied with by all the registered
intermediaries.
1 Prevention of Money-Laundering (Maintenance of Records) Rules, 2005
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3. These guidelines shall also apply to the branches of the Stock Exchanges,
registered intermediaries, and their subsidiaries situated abroad, especially, in
countries which do not apply or insufficiently apply the recommendations made by
the Financial Action Task Force (FATF), to the extent local laws and regulations
permit. When the local applicable laws and regulations prohibit implementation of
these requirements, the same shall be brought to the notice of SEBI.
4. SEBI has from time to time issued circulars/directives with regard to Know Your
Client (KYC), Client Due Diligence (CDD), Anti-Money Laundering (AML) and
Combating the Financing of Terrorism (CFT) specifying the minimum
requirements. It is emphasized that the registered 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.
5. On and from the issue of this Circular, the earlier circulars issued by SEBI on the
subject of Anti-Money Laundering and Combating the Financing of Terrorism,
listed out in the Appendix, shall stand rescinded. Notwithstanding such rescission,
anything done or any action taken or purported to have been done or taken under
the circulars specified in Appendix, shall be deemed to have been done or taken
under the corresponding provisions of this Master Circular.
6. This Circular is available at www.sebi.gov.in under the link “Legal Master
Circulars”.
Yours faithfully,
Sapna Sinha
Deputy General Manager
Phone No. 022-26449748
Email id: sapnas@sebi.gov.in
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Table of Contents
Overview ............................................................................................................................................... 4
Background ......................................................................................................................................... 4
Policies and Procedures to Combat Money Laundering and Terrorist financing ............ 5
Essential Principles: ..................................................................................................................... 5
Obligation to establish policies and procedures .................................................................. 6
Written Anti Money Laundering Procedures .......................................................................... 7
Client Due Diligence (CDD) ......................................................................................................... 8
Policy for acceptance of clients ............................................................................................... 11
Client identification procedure ................................................................................................. 14
Reliance on third party for carrying out Client Due Diligence (CDD) ............................. 16
Risk Management ......................................................................................................................... 17
Risk-based Approach ..................................................................................................................... 17
Risk Assessment ............................................................................................................................ 17
Monitoring of Transactions ....................................................................................................... 18
Suspicious Transaction Monitoring and Reporting ............................................................ 19
Record Management ................................................................................................................... 21
Information to be maintained ...................................................................................................... 21
Record Keeping ............................................................................................................................. 21
Retention of Records .................................................................................................................... 22
Procedure for freezing of funds, financial assets or economic resources or related
services .......................................................................................................................................... 23
List of Designated Individuals/ Entities ................................................................................. 24
Jurisdictions that do not or insufficiently apply the FATF Recommendations........... 25
Reporting to Financial Intelligence Unit-India ...................................................................... 26
Designation of officers for ensuring compliance with provisions of PMLA ................ 28
Hiring and Training of Employees and / Investor Education ........................................... 29
Repeal and Savings ..................................................................................................................... 30
Appendix ........................................................................................................................................ 31
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Overview
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.
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), Stock Exchanges, Depositories and other recognised entities
under the SEBI Act and Regulations and rules thereunder. While it is
recognized that a “one- size-fits-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.
Background
3. As per the provisions of PMLA and the Prevention of Money-Laundering
(Maintenance of Records) Rules, 2005 (Maintenance of Records Rules), as
amended from time to time and notified by the Government of India, every
reporting entity (which includes intermediaries registered under section 12 of
the SEBI Act, i.e. a stock-broker, share transfer agent, banker to an issue,
trustee to a trust deed, registrar to an issue, asset management company,
depository participant, merchant banker, portfolio manager, investment adviser
and any other intermediary associated with the securities market and registered
under Section 12 of the SEBI Act and stock exchanges), shall have to adhere
to the client account opening procedures, maintenance records and reporting
of such transactions as prescribed by the PMLA and rules notified there under.
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The Maintenance of Records Rules empower SEBI to specify the information
required to be maintained by the intermediaries and the procedure, manner and
form in which it is to be maintained. It also mandates the reporting entities to
evolve an internal mechanism having regard to any guidelines issued by the
regulator for detecting the transactions specified in the Maintenance of Records
Rules and for furnishing information thereof, in such form as may be directed
by SEBI.
4. The PMLA inter alia provides that violating the prohibitions on manipulative and
deceptive devices, insider trading and substantial acquisition of securities or
control as provided in Section 12A read with Section 24 of the SEBI Act will be
treated as a scheduled offence under schedule B of the PMLA.
Policies and Procedures to Combat Money Laundering and Terrorist
Financing
Essential Principles:
5. 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 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 and the requirements as laid down
in the PMLA and guidelines issued by the Government of India from time to
time.
6. In case there is a variance in Client Due Diligence (CDD)/ Anti Money
Laundering (AML) standards specified by SEBI and the regulators of the host
country, branches/overseas subsidiaries of registered intermediaries are
required to adopt the more stringent requirements of the two.
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Obligation to establish policies and procedures
7. 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 registered intermediaries ensure the fulfilment of the aforementioned
obligations.
8. 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:
i. 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;
ii. ensure that the content of these Directives are understood by all staff
members;
iii. 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;
iv. adopt client acceptance policies and procedures which are sensitive to the
risk of ML and TF;
v. undertake 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;
vi. have a system in place for identifying, monitoring and reporting suspected
ML or TF transactions to the law enforcement authorities; and
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vii. develop staff members’ awareness and vigilance to guard against ML and
TF.
9. Policies and procedures to combat ML and TF shall cover:
i. 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;
ii. Client acceptance policy and client due diligence measures, including
requirements for proper identification;
iii. Maintenance of records;
iv. Compliance with relevant statutory and regulatory requirements;
v. Co-operation with the relevant law enforcement authorities, including the
timely disclosure of information; and
vi. 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; and,
vii. 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.
Written Anti Money Laundering Procedures
10. 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 four specific parameters which
are related to the overall ‘Client Due Diligence Process’:
i. Policy for acceptance of clients;
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ii. Procedure for identifying the clients;
iii. Risk Management;
iv. Monitoring of Transactions.
Client Due Diligence (CDD)
11. The CDD measures comprise the following:
i. 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 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;
ii. Verify the client’s identity using reliable, independent source documents,
data or information;
iii. 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 -
a) For clients other than individuals or trusts: Where the client is a
person other than an individual or trust, viz., company, partnership
or unincorporated association/body of individuals, the intermediary
shall identify the beneficial owners of the client and take reasonable
measures to verify the identity of such persons, through the following
information:
aa) The identity of the natural person, who, whether acting
alone or together, or through one or more juridical person,
exercises control through ownership or who ultimately has a
controlling ownership interest;
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Explanation: Controlling ownership interest means owner-
ship of/ entitlement to:
i. more than 25% of shares or capital or profits of the
juridical person, where the juridical person is a
company;
ii. more than 15% of the capital or profits of the juridical
person, where the juridical person is a partnership; or
iii. more than 15% of the property or capital or profits of
the juridical person, where the juridical person is an
unincorporated association or body of individuals.
bb) In cases where there exists doubt under clause (aa) above
as to whether the person with the controlling ownership
interest is the beneficial owner or where no natural person
exerts control through ownership interests, the identity of the
natural person exercising control over the juridical person
through other means;
Explanation: Control through other means can be exercised
through voting rights, agreement, arrangements or in any
other manner.
cc) Where no natural person is identified under clauses (aa) or
(bb) above, the identity of the relevant natural person who
holds the position of senior managing official.
b) For client which is a trust: Where the client is a trust, the
intermediary shall identify the beneficial owners of the client and
take reasonable measures to verify the identity of such persons,
through the identity of the author of the trust, the trustee, the
protector, the beneficiaries with 15% or more interest in the trust
and any other natural person exercising ultimate effective control
over the trust through a chain of control or ownership;
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c) Exemption in case of listed companies: Where the client or the
owner of the controlling interest is a company listed on a stock
exchange, or is a majority owned subsidiary of such a company,
it is not necessary to identify and verify the identity of any
shareholder or beneficial owner of such companies;
d) Applicability for foreign investors: Registered intermediaries
dealing with foreign investors’ may be guided by SEBI Master
Circular SEBI/HO/AFD-2/CIR/P/2022/175 dated December
19,2022 and amendments thereto, if any, for the purpose of
identification of beneficial ownership of the client;
e) The Stock Exchanges and Depositories shall monitor the
compliance of the aforementioned provision on identification of
beneficial ownership through half yearly internal audits. In case of
mutual funds, compliance of the same shall be monitored by the
Boards of the Asset Management Companies and the Trustees
and in case of other registered intermediaries, by their Board of
Directors.
iv. 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 (iii);
v. Understand the ownership and control structure of the client;
vi. 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;
vii.Registered intermediaries shall review the due diligence measures
including verifying again the identity of the client and obtaining
information on the purpose and intended nature of the business
relationship, as the case may be, when there are suspicions of money
laundering or financing of the activities relating to terrorism or where
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there are doubts about the adequacy or veracity of previously obtained
client identification data; and
viii. Registered intermediaries shall periodically update all documents, data
or information of all clients and beneficial owners collected under the
CDD process.
Policy for acceptance of clients
12. 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:
i. No registered intermediary shall allow the opening of or keep any
anonymous account or account in fictitious names or account on behalf of
other persons whose identity has not been disclosed or cannot be verified;
ii. 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 higher;
Such clients require higher degree of due diligence and regular update of
Know Your Client (KYC) profile;
iii. The registered intermediaries shall undertake enhanced due diligence
measures as applicable for Clients of Special Category (CSC). CSC shall
include the following:
a) Non - resident clients;
b) High net-worth clients;
c) Trust, Charities, Non-Governmental Organizations (NGOs)and
organizations receiving donations;
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d) Companies having close family shareholdings or beneficial ownership;
e) Politically Exposed Persons (PEP). 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 paragraph 14 of this
circular shall also be applied to the accounts of the family members or close
relatives of PEPs;
f) Clients in high risk countries. While dealing with clients from or situate in
high risk countries or geographic areas or when providing delivery of
services to clients through high risk countries or geographic areas i.e.
places where existence or effectiveness of action against money
laundering or terror financing is suspect, registered intermediaries apart
from being guided by the FATF statements that inter alia identify such
countries or geographic areas that do not or insufficiently apply the FATF
Recommendations, published by the FATF on its website (www.fatf-
gafi.org) from time to time, shall also independently access and consider
other publicly available information along with any other information which
they may have access to. However, this shall not preclude registered
intermediaries from entering into legitimate transactions with clients from or
situate in such high risk countries and geographic areas or delivery of
services through such high risk countries or geographic areas;
g) Non face to face clients. Non face to face clients means clients who open
accounts without visiting the branch/offices of the registered intermediaries
or meeting the officials of the registered intermediaries. Video based
customer identification process is treated as face-to-face onboarding of
clients;
h) 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.
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iv. 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.
v. Ensure that an account is not opened where the intermediary is unable to
apply appropriate CDD measures. This shall apply 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 registered 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 registered intermediary shall be cautious to ensure that it
does not return securities or money that may be from suspicious trades.
However, the registered intermediary shall consult the relevant authorities
in determining what action it shall take when it suspects suspicious trading.
vi. 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.
vii. 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.
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viii. The CDD process shall necessarily be revisited when there are suspicions
of ML/TF.
Client identification procedure
13. The KYC policy shall clearly spell out the client identification procedure (CIP)
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.
14. Registered intermediaries shall be in compliance with the following
requirements while putting in place a CIP:
i. 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.
ii. 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.
iii. 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.
iv. The client shall be identified by the intermediary by using reliable sources
including documents / information. 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.
v. The information must be adequate enough to satisfy competent authorities
(regulatory / enforcement authorities) in future that due diligence was
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observed by the intermediary in compliance with the directives. Each
original document shall be seen prior to acceptance of a copy.
vi. Failure by prospective client to provide satisfactory evidence of identity shall
be noted and reported to the higher authority within the intermediary.
15. SEBI has specified the minimum requirements relating to KYC for certain
classes of registered intermediaries from time to time. Taking into account the
basic principles enshrined in the KYC norms which have already been specified
or which may be specified 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.
16. 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.
17. 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.
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
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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 registered intermediaries and non-compliance shall attract
appropriate sanctions.
Reliance on third party for carrying out Client Due Diligence (CDD)
18. Registered intermediaries may rely on a third party for the purpose of -
i. identification and verification of the identity of a client and
ii. Determination of whether the client is acting on behalf of a beneficial owner,
identification of the beneficial owner and verification of the identity of the
beneficial owner. Such third party shall be regulated, supervised or
monitored for, and have measures in place for compliance with CDD and
record-keeping requirements in line with the obligations under the PML Act.
19. Such reliance shall be subject to the conditions that are specified in Rule 9 (2)
of the PML Rules and shall be in accordance with the regulations and circulars/
guidelines issued by SEBI from time to time. In terms of Rule 9(2) of PML
Rules:
i. The registered intermediary shall immediately obtain necessary information
of such client due diligence carried out by the third party;
ii. The registered intermediary shall take adequate steps to satisfy itself that
copies of identification data and other relevant documentation relating to the
client due diligence requirements will be made available from the third party
upon request without delay;
iii. The registered intermediary shall be satisfied that such third party is
regulated, supervised or monitored for, and has measures in place for
compliance with client due diligence and record-keeping requirements in
line with the requirements and obligations under the Act;
iv. The third party is not based in a country or jurisdiction assessed as high
risk;
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The registered intermediary shall be ultimately responsible for CDD and
undertaking enhanced due diligence measures, as applicable
Risk Management
Risk-based Approach
20. Registered intermediaries shall apply a Risk Based Approach (RBA) for
mitigation and management of the identified risk and should have policies
approved by their senior management, controls and procedures in this regard.
Further, the registered intermediaries shall monitor the implementation of the
controls and enhance them if necessary.
21. 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.
22. 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.
Risk Assessment
23. Registered intermediaries shall carry out risk assessment to identify, assess
and take effective measures to mitigate its money laundering and terrorist
financing risk with respect to its clients, countries or geographical areas, nature
and volume of transactions, payment methods used by clients, etc.
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24. The risk assessment carried out shall consider all the relevant risk factors
before determining the level of overall risk and the appropriate level and type
of mitigation to be applied. The assessment shall be documented, updated
regularly and made available to competent authorities and self-regulating
bodies, as and when required.
25. The risk assessment shall also take into account any country specific
information that is circulated by the Government of India and SEBI from time to
time, as well as, the updated list of individuals and entities who are subjected
to sanction measures as required under the various United Nations' Security
Council Resolutions.
Monitoring of Transactions
26. 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.
27. 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/FIU-IND/ other relevant
Authorities, during audit, inspection or as and when required.
28. The registered intermediaries shall apply client due diligence measures also to
existing clients on the basis of materiality and risk, and conduct due diligence
on such existing relationships appropriately. The extent of monitoring shall be
aligned with the risk category of the client.
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29. 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.
30. 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.
Suspicious Transaction Monitoring and Reporting
31. Registered 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, registered intermediaries shall be guided by the definition of a
suspicious transaction contained in PML Rules as amended from time to time.
32. 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:
i Clients whose identity verification seems difficult or clients that appear not to
cooperate;
ii Asset management services for clients where the source of the funds is not
clear or not in keeping with clients’ apparent standing /business activity;
iii Clients based in high risk jurisdictions;
iv Substantial increases in business without apparent cause;
v Clients transferring large sums of money to or from overseas locations with
instructions for payment in cash;
vi Attempted transfer of investment proceeds to apparently unrelated third
parties;
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vii Unusual transactions by CSCs and businesses undertaken by offshore
banks/financial services.
33. Any suspicious transaction shall be immediately notified to the
Designated/Principal 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 Designated/ Principal 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.
34. 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
registered intermediaries shall report all such attempted transactions in STRs,
even if not completed by clients, irrespective of the amount of the transaction
35. Paragraph 12 (iii) (f) of this 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’. Registered 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.
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Record Management
Information to be maintained
36. Registered 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.
Record Keeping
37. Registered intermediaries shall ensure compliance with the record keeping
requirements contained in the SEBI Act, 1992, Rules and Regulations made
thereunder, PMLA as well as other relevant legislation, Rules, Regulations,
Exchange Byelaws and Circulars.
38. 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 behaviour.
39. In case of any suspected 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:
i. the beneficial owner of the account;
ii. the volume of the funds flowing through the account; and
iii. for selected transactions:
a. the origin of the funds
b. the form in which the funds were offered or withdrawn, e.g. cheques,
demand drafts etc.
c. the identity of the person undertaking the transaction;
d. the destination of the funds;
e. the form of instruction and authority.
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40. Registered Intermediaries shall 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 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 thereunder PMLA, other relevant
legislations, Rules and Regulations or Exchange byelaws or circulars.
41. More specifically, all the registered intermediaries shall put in place a system
of maintaining proper record of the nature and value of transactions which has
been prescribed under Rule 3 of PML Rules as mentioned below:
i. all cash transactions of the value of more than ten lakh rupees or its
equivalent in foreign currency;
ii. all series of cash transactions integrally connected to each other which
have been individually valued below rupees ten lakh or its equivalent in
foreign currency where such series of transactions have taken place
within a month and the monthly aggregate exceeds an amount of ten
lakh rupees or its equivalent in foreign currency;
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.
iii. all cash transactions where forged or counterfeit currency notes or bank
notes have been used as genuine or where any forgery of a valuable
security or a document has taken place facilitating the transactions;
iv. all suspicious transactions whether or not made in cash and including,
inter-alia, credits or debits into or from any non-monetary account such
as demat account, security account maintained by the registered
intermediary.
Retention of Records
42. Registered intermediaries shall take appropriate steps to evolve an internal
mechanism for proper maintenance and preservation of such records and
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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
five years from the date of transactions between the client and intermediary.
43. As stated in paragraph 13 and 14, registered intermediaries are required to
formulate and implement the CIP containing the requirements as laid down in
Rule 9 of the PML Rules and such other additional requirements that it
considers appropriate. Records evidencing the identity of its clients and
beneficial owners as well as account files and business correspondence shall
be maintained and preserved for a period of five years after the business
relationship between a client and intermediary has ended or the account has
been closed, whichever is later.
44. 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.
45. Registered Intermediaries shall maintain and preserve the records of
information related to transactions, whether attempted or executed, which are
reported to the Director, FIU – IND, as required under Rules 7 and 8 of the PML
Rules, for a period of five years from the date of the transaction between the
client and the intermediary.
Procedure for freezing of funds, financial assets or economic resources or
related services
46. The Stock exchanges and the registered intermediaries shall ensure that in
terms of Section 51A of the Unlawful Activities (Prevention) Act, 1967 (UAPA)
and amendments thereto, they do not have any accounts in the name of
individuals/entities appearing in the lists of individuals and entities, suspected
of having terrorist links, which are approved by and periodically circulated by
the United Nations Security Council (UNSC).
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47. In order to ensure expeditious and effective implementation of the provisions of
Section 51A of UAPA, Government of India has outlined a procedure through
an order dated February 02, 2021 (Annexure 1) for strict compliance. These
guidelines have been further amended vide a Gazette Notification dated June
08, 2021 (Annexure 2).
List of Designated Individuals/ Entities
48. The Ministry of Home Affairs, in pursuance of Section 35(1) of UAPA 1967,
declares the list of individuals/entities, from time to time, who are designated
as 'Terrorists'. The registered intermediaries shall take note of such lists of
designated individuals/terrorists, as and when communicated by SEBI.
49. All orders under section 35 (1) and 51A of UAPA relating to funds, financial
assets or economic resources or related services, circulated by SEBI from
time to time shall be taken note of for compliance.
50. 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 https://press.un.org/en/content/press-release. The details of the lists
are as under:
i. The “ISIL (Da’esh) &Al-Qaida Sanctions List”, which includes names of
individuals and entities associated with the Al-Qaida. The updated ISIL &
Al-Qaida Sanctions List is available at:
https://www.un.org/securitycouncil/sanctions/1267/press-releases.
ii. The list issued by United Security Council Resolutions 1718 of designated
Individuals and Entities linked to Democratic People's Republic of Korea
www.un.org/securitycouncil/sanctions/1718/press-releases.
51. 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.
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52. The Stock Exchanges and the registered intermediaries shall maintain updated
designated lists in electronic form and run a check on the given parameters on
a regular basis to verify whether the designated individuals/entities are holding
any funds, financial assets or economic resources or related services held in
the form of securities with them.
53. The Stock exchanges and the registered intermediaries shall also file a
Suspicious Transaction Report (STR) with FIU-IND covering all transactions
carried through or attempted in the accounts covered under the list of
designated individuals/entities under Section 35 (1) and 51A of UAPA.
54. Full details of accounts bearing resemblance with any of the individuals/entities
in the list shall immediately be intimated to the Central [designated] Nodal
Officer for the UAPA, at Fax No.011-23092551 and also conveyed over
telephone No. 011-23092548. The particulars apart from being sent by post
shall necessarily be conveyed on email id: jsctcr-mha@gov.in.
55. The Stock exchanges and the registered intermediaries shall also send a copy
of the communication mentioned above to the UAPA Nodal Officer of the
State/UT where the account is held and to SEBI and FIU-IND, without delay.
The communication shall be sent to SEBI through post and through email
(sebi_uapa@sebi.gov.in) to the UAPA nodal officer of SEBI, Deputy General
Manager, Division of FATF, Market Intermediaries Regulation and Supervision
Department, Securities and Exchange Board of India, SEBI Bhavan II, Plot No.
C7, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051. The
consolidated list of UAPA Nodal Officers is available at the website of
Government of India, Ministry of Home Affairs.
Jurisdictions that do not or insufficiently apply the FATF Recommendations
56. FATF Secretariat after conclusion of each of it’s plenary, releases public
statements and places jurisdictions under increased monitoring to address
strategic deficiencies in their regimes to counter money laundering, terrorist
financing, and proliferation financing risks. In this regard, FATF Statements
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circulated by SEBI from time to time, and publicly available information, for
identifying countries, which do not or insufficiently apply the FATF
Recommendations, shall be considered by the registered intermediaries.
57. The registered intermediaries shall take into account the risks arising from the
deficiencies in AML/CFT regime of the jurisdictions included in the FATF
Statements. However, it shall be noted that the regulated entities are not
precluded from having legitimate trade and business transactions with the
countries and jurisdictions mentioned in the FATF statements.
Reporting to Financial Intelligence Unit-India
58. In terms of the PML Rules, registered 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
6th Floor, Tower-2, Jeevan Bharati Building,
Connaught Place, New Delhi-110001, INDIA
Telephone : 91-11-23314429, 23314459
91-11-23319793(Helpdesk) Email:helpdesk@fiuindia.gov.in
(For FINnet and general queries)
ctrcell@fiuindia.gov.in
(For Reporting Entity / Principal Officer registration related queries)
complaints@fiuindia.gov.in
Website: http://fiuindia.gov.in
59. Registered intermediaries shall carefully go through all the reporting
requirements and formats that are available on the website of FIU – IND under
the Section Obligation of Reporting Entity – Furnishing Information -
Reporting Format (https://fiuindia.gov.in/files/downloads/
Filing_Information.html). These documents contain detailed directives on the
compilation and manner/procedure of submission of the reports to FIU-IND.
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The related hardware and technical requirement for preparing reports, the
related data files and data structures thereof are also detailed in these
documents. While detailed instructions for filing all types of reports are given
in the instructions part of the related formats, registered intermediaries shall
adhere to the following:
i. The Cash Transaction Report (CTR) (wherever applicable) for each month
shall be submitted to FIU-IND by 15th of the succeeding month.
ii. 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.
iii. The Non Profit Organization Transaction Reports (NTRs) for each shall be
submitted to FIU-IND by 15th of the succeeding month.
iv. The Principal Officer will be responsible for timely submission of CTR, STR
and NTR to FIU-IND;
v. Utmost confidentiality shall be maintained in filing of CTR, STR and NTR to
FIU-IND.
vi. No nil reporting needs to be made to FIU-IND in case there are no cash/
suspicious/non-profit organization transactions to be reported.
60. Registered Intermediaries shall not put any restrictions on operations in the
accounts where an STR has been made. Registered 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.
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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.
It is further clarified that "proceeds of crime" include property not only derived
or obtained from the scheduled offence but also any property which may directly
or indirectly be derived or obtained as a result of any criminal activity relatable
to the scheduled offence.
Designation of officers for ensuring compliance with provisions of PMLA
61. Appointment of a Principal Officer: 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-IND. 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.
62. Appointment of a Designated Director: In addition to the existing requirement
of designation of a Principal Officer, the registered intermediaries shall also
designate a person as a 'Designated Director'. In terms of Rule 2 (ba) of the
PML Rules, the definition of a Designated Director reads as under:
“Designated director means a person designated by the reporting entity to
ensure overall compliance with the obligations imposed under chapter IV of the
Act and the Rules and includes –
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a) the Managing Director or a Whole-Time Director duly authorized
by the Board of Directors if the reporting entity is a company,
b) the managing partner if the reporting entity is a partnership firm,
c) the proprietor if the reporting entity is a proprietorship firm,
d) the managing trustee if the reporting entity is a trust,
e) a person or individual, as the case may be, who controls and
manages the affairs of the reporting entity if the reporting entity is
an unincorporated association or a body of individuals, and
f) such other person or class of persons as may be notified by the
Government if the reporting entity does not fall in any of the
categories above”.
63. In terms of Section 13 (2) of the PMLA, the Director, FIU – IND can take
appropriate action, including levying monetary penalty, on the Designated
Director for failure of the intermediary to comply with any of its AML/CFT
obligations.
64. Registered intermediaries shall communicate the details of the Designated
Director, such as, name designation and address to the Office of the Director,
FIU – IND.
Hiring and Training of Employees and Investor Education
65. Hiring of Employees: 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.
66. Training of Employees: The registered intermediaries shall have an ongoing
employee training programme so that the members of the staff are adequately
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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.
67. Investor Education: Implementation of AML/CFT measures requires
registered 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 registered intermediaries to sensitize their clients
about these requirements as the ones emanating from AML and CFT
framework. Registered intermediaries shall prepare specific literature/
pamphlets etc. so as to educate the client of the objectives of the AML/CFT
programme.
Repeal and Savings
68. On and from the issue of this Circular, the circulars listed out in the Appendix
to this Circular shall stand rescinded. Notwithstanding such rescission, anything
done or any action taken or purported to have been done or taken, shall be
deemed to have been done or taken under the corresponding provisions of this
Master Circular.
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Appendix
The following Circulars shall stand rescinded from the date of issuance of this
Circular
1. SEBI/HO/MIRSD/DOP/CIR/P/2019/113 dated October 15, 2019 – Guidelines
on Anti-Money Laundering (AML) Standards and Combating the Financing of
Terrorism(CFT) / Obligations of Securities Market Intermediaries under the
Prevention of Money Laundering Act, 2002 and Rules framed thereunder
2. SEBI/HO/MIRSD/DOP/CIR/P/2021/36 dated March 25, 2021- Combating
Financing of Terrorism (CFT) under Unlawful Activities (Prevention) Act,
1967 –Directions to Stock Exchanges, Depositories and all registered
intermediaries
3. SEBI/HO/MIRSD/DOP/CIR/P/2019/69 dated May 28, 2019 - Combating
Financing of Terrorism (CFT) under Unlawful Activities (Prevention) Act,
1967 –Directions to stock exchanges, depositories and all registered
intermediaries
4. CIR/MIRSD/1/2014 dated March 12,2014 - Anti-Money Laundering/Countering
the Financing of Terrorism (AML/CFT) Obligations of Securities Market
Intermediaries under the Prevention of Money-laundering Act, 2002 and
Rules framed there under
5. ISD/AML/CIR/1/2010 dated February 12, 2010 - Anti Money Laundering
(AML) Standards/Combating Financing of Terrorism (CFT)/Obligations of
Securities Market Intermediaries under Prevention of Money Laundering Act,
2002 and Rules framed there-under- Master Circular on AML/CFT
6. ISD/AML/CIR-2/2009 dated October 23, 2009 - Combating Financing of
Terrorism (CFT) under Unlawful Activities (Prevention) Act, 1967 –
Directions to stock exchanges, depositories and all registered
intermediaries.
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