Checklist For Prevention Of Money Laundering

Introduction – The Prevention of Money Laundering Act, 2002 (PMLA) has been brought into force with effect from 1st July, 2005. Necessary Notifications/Rules under the said Act have been published in the Gazette of India on 1st July, 2005 by the Department of Revenue, Ministry of Finance, Government of India.

As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules notified under the PMLA. As per Rule 3 of Prevention of Money Laundering Rules, 2005 such transactions include:

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

• All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month.

• All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place.

• All suspicious transactions whether or not made in cash.

SEBI had, vide Circular No. ISD/CIR/RR/AML/1/06 dated 18/01/2006, issued the Guidelines to the intermediaries as specified above, in the context of the recommendations made by the Financial Action Task Force (FATF) on anti-money laundering standards. Compliance with these standards by all intermediaries and the country has become imperative for international financial relationships. It may be noted that these Guidelines lay down the minimum requirements/disclosures to be made in respect of clients. The intermediaries may, according to their requirements specify additional disclosures to be made by clients to address concerns of Money Laundering and suspicious transactions undertaken by clients.

SEBI had, vide Circular No. ISD/CIR/RR/AML/1/06 dated 18/01/2006, advised all intermediaries to ensure that a proper policy framework as per the Guidelines on anti-money laundering measures is put into place within one month from the date of the circular.

The intermediaries were required to designate an officer as ‘Principal Officer’ who would be responsible for ensuring compliance of the provisions of the PMLA. Names, designation and addresses (including e-mail addresses) of ‘Principal Officer’ shall be intimated to the Office of the Director-FIU, 6th Floor, Hotel Samrat, Chanakyapuri, New Delhi – 110 021, India on an immediate basis.

The Guidelines on Anti-Money Laundering Standards provides a general background on the subjects of money laundering and terrorist financing summarizes the main provisions of the applicable anti-money laundering and anti-terrorist financing legislation in India and provides guidance on the practical implications of the Act. The Guidelines also sets out the steps that a registered intermediary and any of its representatives, should implement to discourage and identify any money laundering or terrorist financing activities.

These Guidelines are intended for use primarily by intermediaries registered under Section 12 of the SEBI Act, 1992. While it is recognized that a “one-size-fits-all” approach may not be appropriate for the securities industry in India, each registered intermediary should consider the specific nature of its business, organizational structure, type of customers and transactions, etc. when implementing the suggested measures and procedures to ensure that they are effectively applied. The overriding principle is that they should be able to satisfy themselves that the measures taken by them are adequate, appropriate and follow the spirit of these measures and the requirements as enshrined in the Prevention of Money Laundering Act, 2002. (PMLA)

Checklist:

The checklist for compliance of Prevention of Money Laundering Act applicable to SEBI Intermediaries is given below:

One Time/Periodical Compliances:

1. Whether proper policy framework as per the Guidelines on anti-money laundering measures is put into place within one month from the date of the SEBI Circular dated 18th Jan., 2006?

2. Whether the above referred policy is approved by Board of Directors?

3. Whether an officer is appointed as ‘Principal Officer’?

4. Whether such appointment of ‘Principal Officer’ is intimated to Office of the Director-FIU, New Delhi?

5. Whether proper record of transactions prescribed under Rule 3 are maintained?

6. Whether the following information in respect of transactions referred to in Rule 3 are maintained and preserved?

1. the nature of the transactions;

2. the amount of the transaction and the currency in which it was denominated;

3. the date on which the transaction was conducted; and

4. the parties to the transaction.

7. Whether an internal mechanism has been evolved for proper maintenance and preservation of such records and information in a manner that allows easy and quick retrieval of data as and when requested by the competent authorities?

8. Whether such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) have been maintained so as to provide, if necessary, evidence for prosecution of criminal behaviour?

9. Whether regularly reviewed the policies and procedures on prevention of money laundering and terrorist financing to ensure their effectiveness?

10. Whether review is done by the person who is different from the person who has framed such policies and procedures?

Ongoing/Continuous Compliance:

11. Whether the following information has been maintained for the purpose of satisfactory audit trail?

1. the beneficial owner of the account;

2. the volume of the funds flowing through the account; and

3. for selected transactions:

1. the origin of the funds;

2. the form in which the funds were offered or withdrawn, e.g. cash, cheques, etc.;

3. the identity of the person undertaking the transaction;

4. the destination of the funds;

5. the form of instruction and authority.

Customer Due Diligence:

12. Whether Customer Due Diligence Process has been conducted?

13. Whether the records of the identity of clients have been maintained?

14. Whether sufficient information in order to identify persons who beneficially own or control securities account has been obtained?

15. Whether beneficial ownership and control has been identified, i.e. which individual(s) ultimately own(s) or control(s) the customer and/or the person on whose behalf a transaction is being conducted?

16. Whether the customer’s identity using reliable, independent source documents, data or information has been verified?

17. Whether ongoing due diligence and scrutiny has been conducted?

Policy for Acceptance of Clients:

18. Whether customer acceptance policy has been defined?

19. Whether safeguard has been taken while accepting the clients that no account is opened in a fictitious or benami name or on an anonymous basis?

20. Whether documentation requirement and other information in respect of different classes of clients depending on perceived risk and having regard to the requirement to the Prevention of Money Laundering Act 2002, guidelines issued by RBI and SEBI from time to time have been collected?

21. Whether the identity of the client is verified for known criminal records or is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide?

22. Whether failure by prospective client to provide satisfactory evidence of identity have been noted and reported to the higher authority?

23. Whether intermediary has 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?

Client Identification Procedure:

24. Whether the client identification programme has been formulated on lines of rules and act of prevention of money laundering?

25. Whether the client identification programme is implemented?

26. Whether Customer Due Diligence has been conducted on a risk sensitive basis depending on the type of customer business relationship?

27. Whether customers are identified as per risk sensitive basis?

Monitoring of Transactions:

28. Whether regular monitoring of transactions is done for ensuring effectiveness of the Anti Money Laundering procedures?

29. Whether special attention has been given to all complex, unusually large transactions/patterns which appear to have no economic purpose?

30. Whether the compliance cell or department has randomly examined a selection of transaction undertaken by clients to comment on their nature i.e. whether they are in the suspicious transactions
    or not?

Suspicious Transaction Monitoring and Reporting:

31. Whether transaction of suspicious nature or any other transaction notified is reported to the appropriate law authority?

32. Whether suspicious transactions are also regularly reported to the higher authorities/head of the department?

33. Whether the cash transaction report (CTR) (wherever applicable) for each month is submitted to FIU-IND by 15th of the succeeding month?

34. Whether the Suspicious Transaction Report (STR) is 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?

35. Whether the Principal Officer has recorded his reasons for treating any transaction or a series of transactions as suspicious? Whether there is any undue delay in arriving at such a conclusion?

36. Whether CDD process is revisited when there are suspicions of money laundering or financing of terrorism (ML/FT)?

Training to Staff and Hiring Policies:

37. Whether the content of PML Guidelines & CFT (Combating Financing of Terrorism) is understood by all staff members? Whether appropriate training has been provided to staff on ongoing basis?

38. Whether staff members’ awareness and vigilance to guard against money laundering and terrorist financing has been developed?

39. Whether having adequate screening procedures in place to ensure high standards when hiring employees?

Investor Education:

40. Whether the intermediary has prepared specific literature/pamphlets, etc. so as to educate clients of the objective of AML?

Audit/Testing of Anti Money Laundering Program:

41. Whether the audit is conducted periodically to test Anti Money Laundering Programme adequacy to meet the compliance requirements?

42. Whether the audit/testing is conducted by member’s own personnel not involved in framing or implementing the AML programme or it is done by a qualified third party?

43. Whether the report of such an audit / testing is placed before the senior management for making
    suitable modifications / improvements in the AML programme?

Procedural Compliances:

44. Whether KYC is complete in all respects before opening any client account?

45. Whether Branch / Relationship Managers are instructed to verify all original documents with copies of the same which form part of supporting to KYC?

46. Whether any account is opened without Introducer details and signature? If yes, whether any employee of the organization has taken interview of the client?

47. Whether any guidelines has been given to branches for the following:

1. No Cash transactions

2. No Third Party Cheque or Securities to be accepted

3. No Demand Draft to be accepted (if accepted then only with Banker’s certificate)

4. POA with Photo Identity and address proof

5. Income Proof of HNI Clients

48. Whether KYC Profile for risk sensitive clients including HNI is updated on periodical basis?

49. Whether the following transactions are monitored and reported to Principal Officer?

1. Client whose identity verifications seems difficult or client appears not to co-operate in providing details.

2. Clients in high risk jurisdictions

3. Substantial increase in volume without apparent cause

4. Large number of accounts having common parameters such as common partners / directors / promoters / address / e-mail address / telephone numbers / introducers or authorized signatories

5. Unusually large cash deposits made by an individual or business

6. Client is willing to accept uneconomic terms without apparent reason

7. Transaction inconsistent with legitimate business activity

8. Transaction inconsistent with the normal pattern of client’s investment activity

9. Client is financially capable of transactions he has asked for

10. Activity of the client is resumed after being in-operative for more than 3 months

11. High value payments made from bank accounts not notified in KYC form

12. Transfer of large number of securities from demat accounts not notified in KYC form or not pertaining to client

13. Multiple transactions of value just below the threshold limit specified in PMLA so as to avoid possible reporting

14. Purchases made on own account transferred to a third party through off market transactions through DP Accounts.

Source- BCAS