CALM-Module-2.

4
Slide 1 - SEBI Master Circular - AML & CFT Obligations of Securities Market:

A very well developed securities market is key to the success of any economy. Indian securities
industry is one of the largest in the world that offers varied options to the investors keeping investor
protection at the core. Securities and Exchange Board of India Sebi has issued guidelines to the
regulated intermediaries of the securities markets as part of the Program on Antimoney Laundering
and Counter Financing of Terrorism. The Lucidly drafted guidelines is aligned to the PMLA 2002.
The obligation to establish an antimoney laundering program lies with each intermediary registered
with Sebi. Adequate care need to be taken by the intermediaries to protect their products, processes
and systems from being misused and abused, to launder unlawfully derived funds, or to finance
terrorist acts. This session will help you to know about the regulatory expectations of SEBI. You
should not be surprised that many of the concepts are similar and even common across different
regulations and even across different countries. This is because the respective legislations are based
on the FATF recommendations and the various regulations in the jurisdictions like PMLA are based
on the legislations. This helps remove any variations and have a common approach to fighting the
global problem of money laundering, except for certain industry and country specific nuances. 3s

Slide 5 - SEBI AML CFT Standards – Contents:

SEBI has issued a Master's Circular on 4 July 2018 which incorporated the previous guidelines and
circulars in relation to antimoney laundering standards. 1s This has 2 parts, part A provides an
overview on the background and essential principles that concern combating money laundering and
terrorist financing. Part B provides a detailed account of the procedures and obligations to be
followed by all Registered Intermediaries to ensure compliance with AML CFT Directives. The
Directives provide a general background and summary of the main provisions of the applicable anti
money laundering and antiterrorist financing legislations in India. The Directives also set out the
steps that a Registered Intermediary or its representatives shall implement to discourage and to
identify any money laundering or terrorist financing activities. The Directive cautions that 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. 1s The overriding principle is that the intermediary 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. 3s

Slide 6 - SEBI Master Circular – Overview:

Policies and procedures are the foundation to any risk framework, and money laundering risk is not
an exception. SEBI guidelines require every intermediary to establish and implement policies,
procedures and internal controls in its AML CFT program. Senior management of a registered
intermediary shall 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. Such policies and procedures, on a
group basis where applicable, shall not only be issued and implemented, but communicated to all the
staff so that they understand the context. 1s Senior management shall also regularly review the
policies and procedures. 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 the same. 2s

Slide 7 - Obligations to Establish Policies & Procedures:

The senior management of the regulated intermediary shall adopt client acceptance policies and
procedures which are sensitive to the risk of money laundering and terrorist financing. Such client
due diligence measures, as appropriate to the risk profile of the client, shall be taken depending on
the type of client business relationship or transaction. Further, there shall be a system in place for
identifying, monitoring and reporting suspected money laundering and terrorist financing
transactions to the law enforcement authorities. Any policy and procedure is only as good as its
implementation. This is dependent upon the staff who are tasked with the appropriate execution of
their roles and responsibilities. Organizations shall continue to develop staff members awareness and
need to be vigilant in guarding against Launderers abusing the Organization for Money laundering
and Terrorist financing means. 3s

Slide 8 - Policies & Procedures – Coverage:

The oftentimes asked question is what should the AML policy cover? This largely depends upon the
business of the client and the environment in which it operates. Sebi Guidelines clearly mentions
that 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. Some of the suggested measures and procedures in the Guidelines may not
be applicable in every circumstance and to all clients. Therefore, policy and procedures need to be
customized to help the organization respond appropriately to their unique challenges. The Policy
shall contain client acceptance policy and client due diligence measures, including requirements for
proper identification of clients. This shall be done prior to commencing the business and on an
ongoing basis. Compliance with relevant statutory and regulatory requirements is mandatory, and
there can be no discretion whatsoever where required. Cooperation with relevant law enforcement
authorities, including the timely disclosure of information, shall be made. The Policy shall also guide
the organization about the importance of safekeep of records to demonstrate its compliance. 1s This
would include what constitutes a record and how it would be maintained and the retention period.
FATF recommendations and the PMLA requires records to be maintained for a period of five years.
The Policy and procedure shall include the role of compliance function and internal audit in ensuring
the robustness and effectiveness of the AML CFT program. As mentioned earlier, to ensure
implementation of these policies, staff should be communicated about the group policies relating to
all management and relevant staff that handle the account. This Policy shall apply to all branches,
including overseas locations. We shall be talking about these in our various sessions. In fact, there
will be dedicated sessions relating to some of these regulatory expectations. 2s

Slide 9 - Client Due Diligence:

The client due diligence measures starts with obtaining sufficient information in order to identify
persons who beneficially own or control the securities account. Where 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.
Identification of beneficial owners is mandatory. The beneficial owner is the natural person or
persons who ultimately own, control or influence a client and all persons on whose behalf a
transaction is being conducted. It also incorporates those persons who exercise ultimate effective
control over legal person or arrangement. Verification of client's identity shall be made using
reliable independent source documents, data or information. The Guidelines provides guidance on
the threshold limits to determine who is the beneficial owner. For different types of legal entities.
The threshold limit is 25% in case of corporate, 15% in the case of partnership, unincorporated
association, all body of individuals or a trust. Further, while the beneficial ownership cannot be
ascertained the identity of the relevant natural person who holds the position of senior Managing
Official. The Guidelines require that the stock exchanges and depositories to monitor the compliance
to the regulatory provisions on identification of beneficial ownership through half yearly internal
audits. 1s 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 intermediaries, by their Board of
Directors. This is covered in detail in a dedicated session called Ultimate Beneficial Owner. 2s

Slide 10 - Client Acceptance Policy:

SEBI guidelines require all registered intermediaries to 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 money laundering and terrorist financing. These policies help the intermediaries apply client due
diligence on a risks sensitive basis Depending on the type of client business relationship or
transaction. The intermediary shall not open any account which is fictitious or under a benami name.
Also, no account shall be opened on an anonymous basis. The risk profile of the client shall be based
on various parameters like client's location, nature of business activity, trading turnover, etc.
Documentation requirements and other information shall be collected in respect of different classes
of clients. 1s The intermediary shall ensure that no account is opened or allowed to commence
business relationship until appropriate CDD measures are completed. In cases where it is not
possible to ascertain the identity of the client or the client is unwilling and reluctant to provide
sufficient information or information provided to the intermediary is suspected to be non genuine,
the intermediary shall not continue to do business with such a person. Further, a suspicious activity
report shall also be filed with the authorities. The guidelines specify that the circumstances under
which the client is permitted to act on behalf of another person or entity shall be clearly laid down. It
shall specify the manner in which the account shall be operated, transaction limits for the operation,
additional authority required for transactions exceeding a specified quantity or value, amongst
others. Adequate verification of a person's authority to act on behalf of the client, say by way of
power of attorney, shall also be carried out. Every client's identity must screened against various
databases and caution lists to ensure that their names do not figure in the prohibited and cautions list.
Please note that client due diligence and know your clients are core controls against money
laundering. 1s These need to be complied with prior to start of business relationship and on an
ongoing basis. You will hear these in various other sessions in this course outlining the significance
of this process. 2s

Slide 11 - Risk Based Approach:

FatF recommends a riskbased approach to client due diligence process basis which suitable controls
can be implemented. This approach helps clients to be categorized as higher or lower risk category
depending on the circumstances such as the client's background, type of business relationship or
transaction, etc. Enhanced due diligence shall be adopted for higher risk categories of clients.
Conversely, a simplified client due diligence process may be adopted for lower risk categories of
clients. This risk profiling determines the way the client is treated in many ways, including the type
and level of documentation, periodic reviews, ongoing transaction monitoring, etc. Registered
intermediaries shall carry out risk assessment to identify, assess and take effective measures to
mitigate its money laundering and terrorist financing risk. This assessment shall be with respect to
its clients, countries or geographical areas, nature and volume of transactions, payment methods
used by clients, et cetera. 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. Irrespective of whether the customer
who otherwise falls under low risk category shall be subjected to enhanced due diligence and higher
levels of scrutiny, If there are suspicions of money laundering and terrorist financing needs, or when
other factors give rise to a belief that the customer does not, in fact, pose a low risk. Risk based
approach is the best way by which more can be done with less. It could be less of budgets or people
which need to be judiciously used to implement such AML control programs that are effective and
focus on high risk issues. It is so important to know the ways and means to implement a risk based
approach and there is a dedicated session focusing on this topic in this course. 3s

Slide 12 - Clients of Special Category:

SEBI guidelines have categorized certain clients as pertaining to special category. These include
individuals like nonresident clients, high net worth clients, and politically exposed persons, or PEPs.
Pep are individuals who are or have been entrusted with prominent public functions in a foreign
country for example, heads of states or of governments, senior politicians, senior bureaucrats or
judicial and military officers, senior executives of state owned corporations, important political party
officials, et cetera. Amongst others. Trust charities, nongovernmental or nonprofit organizations, and
organizations receiving donations also pertain to special category. Further, companies having close
family shareholdings or beneficial ownership, those offering foreign exchange offerings shall be
considered a special category. Those clients domiciled or having dealings in high risk countries
where existence or effectiveness of money laundering controls is suspect or where there is unusual
banking secrecy or such, other countries considered as prone to predicate offenses shall be deemed
as special category. These days, with increased technological advancement, nonface to face clients
are on the rise and such clients are categorized as special category. Organizations need to have their
eyes and ears open to constantly be aware of the information available in public domain. Clients
with dubious reputation as per public information available, etc. Are also of special category. While
SEBI has suggested these categories as special more as indicative, it shall be up to the intermediary
to exercise independent judgment to ascertain whether any other set of clients shall be classified as
special category or not. Those in the category of special client shall be subject to enhanced due
diligence and closer transaction monitoring programs.

Slide 13 - Client Identification Procedure:

The Sebi Guidelines require that the Intermediaries KYC Policy shall clearly spell out the client
identification procedure. This shall be carried out at different stages of the relationship, starting with
the start of the business 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. The guidelines also stipulate certain requirements that need to be complied with
by the intermediaries as part of their client identification procedure. All intermediaries shall have an
appropriate procedure and systems in place to determine whether their client or potential client or the
beneficial owner of such client is a politically exposed person. This shall include seeking relevant
information from the client, referring to publicly available information, or accessing the commercial
electronic databases of PEPs or any other caution list on an ongoing basis. Intermediaries are
required to obtain senior management approval for establishing business relationships with PEPs all
when an existing client subsequently becomes a Pep. It is obligated that the intermediaries shall take
reasonable measures to verify the sources of funds as well as the wealth of clients and beneficial
owners. Any information relied upon by the intermediary shall be from a reliable source backed by
documentation. The information must be adequate enough to satisfy competent authorities in future
that due diligence was observed to prove their compliance with the directives. Each original
document shall be seen prior to acceptance of a copy. Where any prospective client fails to provide
satisfactory evidence of identity, such clients shall be noted and reported to the higher authority
within the intermediary and even be considered for filing a Suspicious Activity report. Further, the
intermediary shall conduct ongoing due diligence depending upon the risk profile of the customer or
where it notices inconsistencies in the information provided. Please note that irrespective of the
amount of investment made by clients, no minimum threshold or exemption is available to registered
intermediaries from obtaining the minimum information or documents from clients as stipulated or
regarding the verification of the records of the identity of clients. In other words, there shall be no
minimum investment threshold or category wise exemption available for carrying out CDD
measures by registered intermediaries. This shall be strictly implemented by all intermediaries, and
noncompliance shall attract appropriate sanctions.

Slide 14 – Record Keeping - Records to be Maintained :

Maintenance of records is yet another important feature of a Good AML program. SEBI requires the
intermediaries, its designated director, officers and employees to maintain the information or records
of types of transactions mentioned under the Prevention of Money Laundering Rules 2005 and Sebi
Act 1992. 2s Intermediaries shall maintain such records as are sufficient to permit reconstruction of
individual transactions. This shall include the information for the accounts of their clients in order to
maintain a satisfactory audit trail relating to the beneficial owner of the account, volume of the funds
flowing through the account. Further for any selected transaction, Origin of the funds, the form in
which the funds were offered or withdrawn, identity of the person undertaking the transaction,
destination of the funds and the form of Instruction and authority shall be maintained. 1s Such
records must be sufficient to permit reconstruction of individual transactions, including the amounts
and types of currency involved, if any, so as to provide, if necessary, evidence for prosecution of
criminal activity. Intermediaries are required to keep not only the documents relating to reporting,
but also all supporting documents and details that are relevant and why such a report was preferred.
In fact, details and reasons as to why a certain transaction was not reported should also be kept.

Slide 15 - Record Keeping – Retention:

These records, as well as those relating to the verification of identity of clients, shall be maintained
for a period of five years. To reckon The computation of the start of the retention period date of the
transaction shall be the base. Any other record which the intermediary is required to maintain for
such period as specified as per legislations and regulations that otherwise govern them, but not less
than for a period of five years from the date of end of the business relationship with the customer. In
case of customer identification data obtained through the customer due diligence process, account
files and business correspondence should be retained for at least five years after the business
relationship is ended. In situations where the records relate to ongoing investigations or transactions
which have been the subject of a disclosure, they should be retained until it is confirmed that the
case has been closed Where practicable.

Slide 16 - Record Keeping – Retention – Document Retention Terms :

Records may be maintained either in the electronic phone and all physical form. Intermediaries
should have appropriate systems and infrastructure for safekeep of documents at the branches and at
the corporate office. Further, the Intermediaries should implement specific procedures for retaining
internal records of transactions, both domestic or international, to enable them to comply swiftly
with information requests from the competent authorities. To be able to comply with this
requirement, a suitable records management software with appropriate classification, indexing and
storage should be in place. 3s

Slide 17 - Reporting Obligations:

Regular monitoring of transactions is vital for ensuring effectiveness of the AML procedures. This is
possible only if the intermediary has established a customer risk profile that will enable an
understanding of the normal activity of the client so that it can identify deviations in transactions or
activities. Further, the compliance department of the Intermediary shall randomly examine a
selection of transactions undertaken by clients to comment whether they are in the nature of
suspicious transactions or not. The Intermediary shall pay special attention to all complex, unusually
large transactions, all patterns which appear to have no economic purpose. The Intermediary may
specify internal threshold limits for each class of client account and pay special attention to
transactions which exceeds these limits. The background, including all documents or office records
or memorandums and 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
and other relevant authorities during audit, inspection or as and when required. These records are
required to be maintained and preserved for a period of five years from the date of transaction
between the client and intermediary. 3s

Slide 18 - Suspicious Transactions Report:

Suspicious Activity Monitoring Program should be appropriate to the organization. The intermediary
shall pay special attention to all complex, unusually large transactions or patterns which appear to
have no economic purpose. The background, including all documents or office records,
memorandum, clarifications sought pertaining to such transactions, and purpose thereof, shall also
be examined carefully and findings shall be recorded in writing. 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. Such cases shall also be considered for suspicious reporting. Any suspicious transaction
shall be immediately notified to the principal 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 client transactions and the nature or reason of suspicion. Care should be taken to ensure that the
client is not tipped off about the investigation or even subsequent reporting. It shall be ensured that
there is continuity in dealing with the client as normal until told otherwise. 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. To ensure
ongoing monitoring, the principal officer or 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. 3s

Slide 19 - Designated Individuals & Entities:

PMLA requires the potential client or existing clients need to be screened against updated list of
individuals and entities which are subject to various sanction measures such as freezing of assets or
accounts, denial of financial services, etc. This List, as approved by the Security Council Committee
established pursuant to various United Nations Security Council resolutions, 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. Further, there are banned entities notified by Ministry of Home of
affairs too. Intermediaries are directed to ensure that accounts are not opened in the name of anyone
whose name appears in said list. Full details of accounts bearing resemblance with any of the
individuals or entities in the List shall immediately be intimated to FIU and SEBI. Individuals
mentioned in various other caution lists provided by SEBI, RBI, Ministry of Corporate Affairs, or
any other regulators should also be screened periodically and suitable action be taken. 3s

Slide 20 – Monitoring and Reporting of Transactions:

The real outcome of an AML CFT program is to report any suspicious transaction to the
enforcement agencies after identifying an investigation. These suspicious transactions need to be
reported to Financial Intelligence Unit, which is the nodal agency set up by the government of India
to track possible money laundering attempts and for further investigation in action. Further, FIU
seeks to coordinate and strengthen the collection and sharing of financial intelligence through
effective national, regional and global network to combat money laundering and related crimes.
Intermediaries should establish procedures to ensure timely and accurate reporting to FIU within the
necessary timeline. It is again reiterated that the reporting of transactions is confidential and the
client shall not be alerted about any internal investigation or reporting to the enforcement agency. 1s
Such an act shall be construed as tipping off and as a criminal offense. 2s

Slide 21 - FIU - Types of Reports:

This slide details the various types of reports to be filed with FIU and the timelines. You will notice
that while these are generic FIU reports across all intermediaries, some of these, like counterfeit
currencies or investments in real estates, may not be applicable. Counterfeit currencies may not be
applicable, given the restrictions in cash transactions. These routine transactions need to be reported
every month within seven days of the following month. SEBI guidelines have provided certain
illustrative, suspicious transactions that may need to be investigated and alerted if found necessary.
These include clients whose identity verification seems difficult or where the source of the funds is
not clear and those clients based in high risk jurisdictions. Further, where there is a substantial
increase in business without apparent calls, or where clients transferring large sums of money to or
from overseas locations with instructions for payment in cash, attempted transfer of investment
proceeds to apparently unrelated third parties or any other unusual transactions shall be reported.
Please note that these are illustrative and you will find more such red flags when we discuss the
various sectors pecific intermediaries like securities and mutual funds. Suspicious transactions need
to be reported within seven working days from the date when transaction was deemed suspicious.
We will look more into the process of transactions monitoring, alert management and reporting in
dedicated sessions later in this course. 2s

Slide 22 - UAPA, 1967 - Freezing of Assets:

SEBI guidelines prohibit the intermediaries from dealing with a customer whose identity matches
with any person in the Sanction list, all with banned entities and those reported to have links with
terrorists or terrorist organizations. A list of individuals and entities subject to UN sanctioned
measures under UNSC resolutions called the Designated entities, are updated from time to time.
Further, there are banned entities notified by Ministry of Home Affairs MHA too. As mentioned
earlier, intermediaries are required to run periodic checks to confirm not only when new customers
approach the intermediary, but also to check if any of the existing customers are in the list. As per
provision of section 51 A of the Unlawful Activities Prevention Act, central government is
empowered to freeze, seize or attach funds and other financial assets or economic resources. These
may be held by, on behalf of, or at the direction of the individuals or entities listed in the scheduled
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. When stock exchanges, depositaries and registered intermediaries find a
positive match, they are required to report immediately where the match is established beyond
doubt. Then further transactions on these accounts shall be blocked. Such reports shall be done
immediately and in any case, within 24 hours from the time of identifying a match, providing
complete details of the policies held by such a customer to the Ministry of Home Affairs over email,
fax and also over telephone. The communication shall also be sent to designated UAPA Nodal
Officer of SEBI. Intermediary shall also file a suspicious transaction report with FIU, India. In
respect of the transactions, whether carried through or attempted on receipt of the particulars of
suspected designated individual or entities, MHA would cause a verification to be conducted by the
State police and all the central agencies so as to ensure that the individuals or entities identified by
the intermediaries are the ones listed as designated individuals or entities. In case the results of the
verification indicate that the accounts are owned by or held for the benefit of the designated
individuals or entities, In order to freeze these accounts under section 51 A of the UAPA would be
issued within 24 hours of such verification, Such orders shall be conveyed electronically to the
concerned office of the intermediary under intimation to SEBI and FIU.

Slide 23 - UAPA, 1967 - Unfreezing of Assets:

This slide deals with the unfreezing of assets. Any individual or entity, if it has evidence to prove
that the freezing of funds, financial assets or economic resources or related services owned or held
by them has been inadvertently frozen, shall move an application giving the requisite evidence in
writing to the concerned stock exchanges or depositories and registered intermediaries. The stock
exchanges or depositories and registered intermediaries shall inform and forward a copy of the
application together with full details of the asset frozen given by any individual or entity informing
of the funds, financial assets or economic resources or related services that have been frozen
inadvertently to the nodal officer of Ministry of Home Affairs. Within two working days, the Joint
Secretary of MHA, being the nodal officer for Division of MHA, shall initiate verification as may be
required on the basis of the evidence furnished by the individual or entity. If the officer is satisfied,
shall pass an order within 15 working days unfreezing the funds, financial assets or economic
resources or related services owned or held by such applicant under intimation to the concerned
stock exchanges, depositories and reduced registered intermediaries. However, if it is not possible
for any reason to pass an order unfreezing the assets within 15 working days, the nodal officer shall
inform the intermediary. 4s

Slide 24 - UAPA, 1967 - Request Received from Foreign Countries:

Periodically, requests are received from foreign countries requesting for freezing of assets of certain
people. Similarly, India would also request their counterparts from time to time. UN Security
Council resolution 1373 obligates countries to freeze without delay the funds or other assets of
persons of such people who commit or attempt to commit terrorist acts or participate in or facilitate
the commission of terrorist acts. This shall also include persons and entities acting on behalf of or at
the direction of such persons and entities, including funds or other assets derived or generated from
property owned or controlled directly or indirectly by such persons, associated persons and entities.
When such requests of foreign countries are received by the Ministry of External Affairs, it shall be
examined forwarded electronically with their comments to the UAPA Nodal Officer for freezing of
funds or other assets. The UAPA Nodal Officer of MHA shall cause the request to be examined
within five working days so as to satisfy itself that, on the basis of applicable legal principles, that
the request is supported. Then the request would be electronically forwarded to the Nodal Officer In
Sebi, the proposed designee would be treated as designated individuals or entities. Upon receipt of
the requests from the UAPA Nodal Officer, the list would be forwarded to stock exchanges,
depositories and intermediaries. Subsequently, the procedure for freezing of assets shall be followed.
The freezing orders shall take place without prior notice to the designated persons involved. 3s

Slide 25 - Designation of Officers - Principal Officers:

SEBI guidelines also mandate the appointment of a principal officer and a designated Director who
shall be responsible for the overall compliance and implementation of various provisions required by
the PMLA. Principal officer of an intermediary shall be appointed by the Board as stipulated by
PMLA. 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. SEBI guidelines require that the principal officer should be a
senior level executive who shall have access to and be able to report to senior management at the
next reporting level or the Board of Directors. This seniority is well founded because junior staff
may be easily influenced by seniors or lack skills to assist the transactions holistically, which could
make the process less effective. The principal officer shall be appointed to ensure compliance with
the obligations imposed PMLA and the PMLA rules. The principal officer should ensure that the
Board approved AML CFT program is being implemented effectively, including monitoring
compliance by the service providers. 1s Further, the principal officer should ensure that employees
of the Intermediary have appropriate resources and are well trained to address questions regarding
the application of the program in light of specific facts. At all times, the principal officer should act
independently and report any issues to senior management. SEBI guidelines also require that the
principal officer and the team should have timely access to customer identification data, other KYC
information, and records in order to assist in execution of AML CFT guidelines. Any change in the
contact details of principal officer for AML CFT Guidelines shall be communicated to SEBI and
FIO within seven days. 2s

Slide 26 - Designation of Officers – Designated Director:

We shall now look into the role of a designated director As mandated by SEBI guidelines. The
Intermediaries Board shall appoint a person as designated Director who will be responsible for the
overall compliance of the obligations imposed under PMLA. The designated director shall mean a
managing director or a whole time director duly authorized by the Board of Directors, If the
reporting entity is a company, the managing partner if the reporting entity is a partnership firm, the
proprietor, if the reporting entity is a proprietorship concern, and the managing Trustee if the
reporting entity is a trust. In case of an unincorporated association or a body of individuals, any
person or individual, as the case may be, who controls and manages the affairs of the reporting entity
shall be the designated director. In any case It shall include such other person or class of persons as
may be notified by the government if the reporting entity does not fall in any of these categories. 1s
For sake of adequate clarification, the terms Managing Director and whole time Director shall have
the meaning assigned to them in the company's act. This is very important because many firms offer
titles like Managing Director, Executive Director and Director to their senior management, which
represents the organizational hierarchy. An interesting directive provided by the Insurance,
Regulatory and Development Authority of India is there is that the principal officer and the principal
directors should not be the same. It is important to note the personal liability of the designated
director. In terms of PMLA, The Director of FIU 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. Any change in the contact details of Principal Director for AML CFT
guidelines shall be communicated to SEBI and FIO, India within seven days. 3s

Slide 27 – Regulatory Requirement – Employee Training:

The registered Intermediaries shall have adequate screening procedures in place to ensure high
standards when hiring employees. The Intermediary shall identify the key positions within their own
organization structures, having regard to the vulnerability of money laundering and terrorist
financing and also the size of their business. The Intermediary shall also ensure that the employees
taking up such key positions are suitable and competent to perform their duties. Regular training is a
prerequisite and one of the pillars for a robust AML framework. The training should focus not only
on the concepts, but also aligned to the business of the Intermediary. Training requirements shall
have specific focus owner of 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. These guidelines shall be
implemented by them consistently and be sensitive to the risks of their systems being misused by
unscrupulous elements. Periodic refresher training interventions should be conducted from time to
time.

Slide 28 - Regulatory Requirement – Employee Training:

Sebi guidelines has been thoughtful in mandating investor education in relation to money laundering
and terrorist financing risks. 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 a need for intermediaries to
sensitize their clients about these requirements as emanating from AML and CFT framework.
Intermediaries shall prepare specific literature or pamphlets, et cetera, so as to educate the client of
the objectives of the AML CFT program. 3s

Slide 29 – Internal Audit:

Internal controls and audit are important tools to ensure that the desired procedures are being
followed. Internal audit is one of the pillars of a robust AML program. SEBI requires the
intermediaries internal audit or inspection departments to verify on a regular basis compliance with
policies, procedures and controls required to be in place under this guidelines. This includes testing
of the system for detecting suspected money laundering transactions, evaluating and checking the
adequacy of exception reports generated on large and all irregular transactions, the quality of
reporting of suspicious transactions, and the level of awareness of frontline staff of their
responsibilities In this regard. The internal audit function shall be independent, adequately
resourced, and commensurate with the size of the business and operations, organization, structure,
number of clients and other such factors. SEBI guidelines require that the stock exchanges and
depositories shall monitor the compliance to the aforementioned provision on identification of
beneficial ownership through half yearly internal audits. The reports should specifically comment on
the robustness of the internal policies and processes in this regard. They should also make
constructive suggestions where necessary to strengthen the policy and implementation aspects.
Exception reporting under AML CFT policy should be done to audit committee of the board. 3s