Mutual Funds & PMLA 2002
Policy framework on Anti Money
Laundering (AML) and Combating Financing of Terrorism (CFT) for Mutual Funds in
India and details the processes that are recommended by Association of Mutual Funds in India (AMFI) to be followed by
Asset Management Companies (AMC’s) as a minimum standard in meeting the various
obligations of the AMCs on AML / CFT as stipulated under the Prevention of
Money Laundering Act, 2002 and the Prevention of Money Laundering Rules, 2005,
as amended from time to time, Master Circular dated December 31, 2010 issued by
Securities & Exchange Board of India (SEBI) and relevant circulars issued
by SEBI up to date.
The Prevention of Money Laundering Act, 2002 (“the Act”) was brought into force from July 1, 2005 and subsequently amended vide Prevention of Money Laundering (Amendment) Act, 2009 effective March 6, 2009 which was further amended vide Prevention of Money Laundering (Amendment) Act, 2012 effective Feb 15, 2013. It is applicable to:
1. Banking companies
2. Financial Institutions
3. Intermediaries registered with SEBI such as stock brokers, sub-brokers, share transfer agent, trustee to a trust deed, registrar to an issue, asset management company, depository participants, merchant bankers, underwriters, portfolio managers, investment advisors, and any other intermediary associated with the securities market and registered under Section 12 of the Securities and Exchange Board of India Act, 1992.
4. Pension Fund Regulatory and Development Authority
The PMLA, 2002 has been amended as the Prevention of Money Laundering (Amendment Act) Act, 2012 vide Gazette Notification dated January 04, 2012 on August 27, 2013, July 7, 2015 and on June 1, 2017. Some of the key amendments are -
• Obligation on reporting entities to appoint a “Designated Director”
• Reliance on a 3rd party for client due diligence (now permitted)
• Powers to audit / penalize any reporting entity by FIU-IND
• C-KYC, CERSAI as a central KYC registry
• Aadhaar number and PAN to be mandatorily obtained for new as well as existing accounts.
Failure to meet obligations by intermediaries empowers the Director - FIU-IND to:
• Issue a warning in writing; or
• Direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or
• Direct such reporting entity or its designated director on the Board or any of its employees, to send reports at such interval as may be prescribed on the measures it is taking; or
• By an order, impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.
SEBI vide its circular dated January 18, 2006 issued guidelines on Anti Money Laundering Standards which mandated that all concerned intermediaries should ensure that a proper policy framework is put in place and they should be updated periodically. AMC’s are also an intermediary (therefore a reporting entity also) under Section 12 of the SEBI Act. All intermediaries are required to designate a person as “Principal Officer (PO)” who is responsible for ensuring compliance of the provisions of the Act and liaise with the relevant authorities. The Principal Officer should be an official with sufficiently high position, independence and authority. All intermediaries are required to work within the overall ambit of the Act and Guidelines issued by SEBI in this context. Over the years, SEBI has issued various circulars with guidelines / directives vis-à-vis procedures and obligations on AML / CFT. SEBI has also issued a Master circular on AML / CFT dated December 31, 2010 which was later revised on March 12, 2014. These circulars also lay down the minimum requirements of controls and due diligences to address concerns of money laundering and suspicious transaction undertaken by clients.
SEBI Directives to Market Intermediaries
Directives to all
intermediaries registered under SEBI are issued to ensure compliance with the
standards set by FATF and FIU-IND on AML and CFT. These directives, inter alia,
relate to:
a. Know Your Customer (KYC) norms
b. Client Due Diligence (CDD)
c. Establishing Beneficial Ownership
d. Monitoring of Transactions
e. Record keeping and Retention
f. Suspicious Transaction Monitoring & Reporting
g. Staff Hiring Policies and Training Programs
Role of Asset Management Companies
The broad responsibilities of Asset Management Committees(AMCs), inter alia, include –
• Appointment of a Designated Director and a Principal Officer
• Management Overview on KYC & Suspicious Transactions Reporting (STR) obligations
• Client Acceptance Policy and its periodic updation as required
• Adequate Client Due Diligence / Enhanced Due Diligence throughout the client relationship
• Monitoring of Clients of Special Categories
• Identification of Beneficial Ownership
• Alert monitoring and reporting using AMFI alerts and other AMC adopted criteria, if any
• Suspicious transactions review & its reporting to FIU-IND
• Reporting transactions of Non-Profit Organizations to FIU-IND
• Record keeping / Retention of documents
• Ensure periodic Internal Audit of AML regime
• Staff Hiring Standards & continuous training programs
Internal AML Committee
The internal AML Committee (or any such committee for eg: Risk Management Committee) may be set up comprising of the Principal Officer (PO) and at least two members of sufficient seniority / experience to ensure unbiased judgment, independency and no internal conflict of interest. The objective of recommending a AML committee is to enable greater scrutiny and validation of potentially reportable STR’s, consider whether all possible factors were considered while arriving at a decision to report cases, that there is no individual prejudice towards a particular investor, so that a certain degree of collective judgment is applied while finalizing STRs. In that, besides the PO, other members would act independently and as facilitators in decision making, offer their considered views and opinions on related matters besides providing their stamp of approval to report STRs. They could also discuss general compliance, new regulations / legislations, co-approve of PEP relationships, help interpret FATF guidance(s) etc. It must be understood that AML/CFT policy making essentially remains the role of a PO, which may be decided / finalized in consultation with the Designated Director and approval by the AMC’s Board. The AML committee in such instances may offer their views on such policies prior to its finalization
KYC and KYC Status
The new
KYC rules that have come into effect from April 1, 2024,divides the KYC status of an individual into three
categories: validated, verified and on-hold.
Investors
with "KYC Validated" status are not required to do anything. They can
easily continue to do all the transactions. However, those with the KYC status
either as "verified" or "on-hold" are required to redo the
KYC process (called re-KYC) using PAN and Aadhaar to get KYC validated status.
Investors whose KYC status is registered or
verified would see no impact on their existing investments, but they would have
to submit the KYC documents again to make new investments. Investors whose KYC
status is on-hold cannot do any transaction until they have done their KYC.
The KYC status can be validated only when the
documents given as proof of identity and proof of address are validated by the
issuing authority concerned. Currently, only PAN and Aadhaar can be validated
by the issuing source.
How to do KYC online for investments
Clients of Special Category/ High Risk:
There are certain categories of investors, including high risk clients and PEPs, who are considered as Clients of Special Category (CSC) in terms of the SEBI Master Circular. These investors may be subjected to enhanced due diligence as determined by the AMC, basis the risk profile of the investor. Irrespective of the investment amount, some investors should be further treated as CSCs and subjected to enhanced due diligence, if required. The list of investors who fall in this category are inter-alia as mentioned below:
a. Non-Resident clients.
b. High Net-worth clients.
c. Trust, Charities, Non-Governmental Organizations (NGOs) and organizations receiving donations.
d. Companies having close family shareholdings or beneficial ownership
e. Politically Exposed Persons (PEP).
f. Current / Former Heads of State, current or former senior high profile politicians and connected persons.
g. Clients in high risk countries (as designated by FATF for ex. Iran or North Korea).
h. Non face to face clients
Reporting
The
PMLA Amendment Rules, 2009 states that the transactions of clients who are
suspected to be engaged in “predicate offences” can be reported as suspicious
irrespective of the value of transactions. The list of such predicate offences
is available in the annual report of the FIU-IND and is available on their
website (refer to references at end of this report). Reasonable efforts may be
taken in-house at AMC’s to ascertain names of persons / entities involved in
predicate offences based on other sources like Google alerts, databases of
banned / tainted individuals & entities, alerts from branches, newspaper
reports / Internet and other publicly available information at a defined
periodicity, inquiries from LEAs / other regulatory bodies, UNSCR / MHA lists,
leads from other group companies, adhoc reports etc. in addition to AMFI
(Association of Mutual Funds in India) specified alerts. 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 Security
Council Committee is available on the United Nations website / Ministry of Home
Affairs, Government of India (GoI). These names -may be monitored closely. The
transactions of these clients are scrutinized regularly for the purpose of STR
reporting and they could also be subject to enhanced due diligence. AMC’s must
note that very stringent standards apply (especially time lines for reporting
to authorities), where their clients, if any, are found on the list of UNSCR /
MHA. These are reporting standards prescribed by the regulator.
Disqualified
Companies and Directors by Registrar of Companies (RoC)
The
Government of India, vide its Press Information Bureau notification dated
September 5, 2017, has exercised its powers under Section 248(5) of the
Companies Act (“the Act”) against companies deemed to be errant. In a decisive
action, the names of over 2 lakh companies have been struck-off from the RoC.
Also, the existing directors and Authorized Signatories of such struck-off
companies are now de facto ex-directors or ex-Authorized Signatories. Since
these struck-off companies have ceased to exist, the government has advised
banks to restrict the operability of the bank accounts of these companies.
These individuals will therefore not be able to operate bank accounts of such
companies till they are legally restored under Section 252 of the Act or by an
order of the National Company Law Tribunal. The list of these companies is
available on the website of the Ministry of Corporate Affairs (MCA).
Additionally, the MCA has also released a list of over 3 lakh disqualified
directors of companies under section 164(2)(A) for non-compliance in matters
such as not filing their financial statements/annual returns for three
financial years, thereby violating provisions of the Act. AMFI has issued
guidance on this matter and has advised AMC’s to take the assistance of RTAs in
collating information of such companies and its directors. Based on a search in
the AMC’s investor database, if found, AMC’s mayuse their discretion including
but not restricted to enhanced due diligence where required while dealing with
these companies / directors or be guided by any higher internal guidance in
such matters. Necessary further action, including filing a STR relating to
both, the companies as well as the directors may be ensured.
Further,
it is advisable to look for any changes – i.e. additions / deletions to the
lists of these companies and directors on the websites of the RoC, on an
on-going basis and consider suitable action as per this guidance.
Training
Besides this, AMC’s may decide on various approaches to manage and collate information at the regional level to support the central AML team. One such approach that could be considered is designating experienced staff as AML Coordinators (AMLCs). Their role could inter alia include conducting training of staff, assist HO in any required manner, sharing of local media reports and any other support activity to assist the central AML team. AMLCs are expected to be familiar with local events and generally function as feeders of predicate offence related news to HO, assist in EDD of clients etc. Needless to add, confidentiality has to be maintained of the highest standards by them. In case AMC’s decide to designate staff as AMLCs, they may want to conduct periodic “train the trainer” programs for AMLCs for effectiveness of their AML regime. They may also send in periodic reports as desired by the Principal Officer in respect of activities carried out, especially EDD and staff training
Happy Reading,
Those who read this, also read:
1. AML/CFT : Definitions, Origin
2. PMLA 2002: Objectives & Applicability
3.Reports by RE under RBI: PMLA2002
4. Capital Markets & PMLA 2002
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