Stock brokers,mutual funds and other market entities will have to update their due diligence on clients on a periodic basis instead of the current practice of doing it as a one-time exercise,as part of regulator SEBI’s fresh efforts to weed-out money-laundering and terror funding from the market.
The Securities and Exchange Board of India,in a recent circular to all market intermediaries,has made it mandatory to “periodically update all documents,data or information of all clients and beneficial owners collected under the CDD (Client Due Diligence) process.”
Besides,SEBI has said that “the CDD process should necessarily be revisited when there are suspicions of money laundering or financing of terrorism (ML/FT).”
Accordingly,the regulator has added these clauses to its Master Circular on “Anti Money Laundering/Combating Financing of Terrorism Standards.”
Previously,brokers,fund houses and depository participants were supposed to conduct a due-diligence through KYC (Know Your Customers) forms and other measures only at the time of signing on a new customer.
While this was efficient in unearthing the misdeeds of customers before they were being signed on,it was inadequate in checking the wrongdoings that the client might have indulged in afterwards.
Besides,the earlier guidelines also provided that a risk-based approach can be taken in the CDD process as “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.”
Accordingly,an enhanced CDD process was being undertaken for higher risk categories of clients and a simplified one for lower risk categories of clients.
However,in its bid to avoid any oversight due to this risk-based approach,the SEBI has now asked the market entities to stop applying “low risk provisions” when there are suspicions of money laundering or terror funding or when other factors give rise to a belief that the customer does not in fact pose a low risk.
Besides,in their dealings with clients in high risk countries where existence/effectiveness of money laundering control is suspect,the intermediaries have been asked to independently consult information in public domain.
They can also consult public domain information and commercial electronic databases and ask the client for information to determine whether he/she is a “politically exposed person (PEP).”
The market entities would also need to “verify the sources of funds as well as the wealth of clients and beneficial owners identified as PEP.”
While the market entities are supposed to file “suspicious transaction report (STR)” on noticing any suspicious activities in the account,SEBI has asked them to refrain from any kind of intimation of the same or “tipping off” to the client,directly or indirectly.
This restraint applies not only to the “filing of the STR and/or related information,but even before,during and after the submission of an STR.”
The regulator has asked the stock exchange to convey the changes to stock brokers and sub brokers. Likewise,the depositories have been asked to inform the depository participants,while AMFI (Association of Mutual Funds in India)have to inform the asset management companies.
Among other objectives,the measures are aimed to check opening of accounts under false names and provide necessary checks and balances to ensure that the identity of the client does not match with any person of criminal background.