SEBI tightens norms to check money laundering,terror funding.

Wednesday, March 12, 2014


Watchdog SEBI Wednesday tightened norms aimed at countering money laundering and terror financing through the capital markets and asked market entities to conduct detailed risk assessment of their clients, including those linked to countries facing international sanctions.

The market intermediaries have also been told to appoint designated directors to ensure compliance with new norms, who would face penal action for any lapses.

Besides, stock exchanges have been asked to monitor the compliance of various entities through half-yearly internal audits and inspections and keep SEBI informed on these issues.

The new norms have come ahead of general elections scheduled for April-May. Such periods typically see a spurt in money laundering, including through the capital markets.

Norms for record-keeping by market entities have been streamlined and would require client details to be "preserved and maintained" for five years after the business relationship has ended or the account is closed.

So far, client details had to be preserved for 10 years. Details that now need to be stored include evidence of the identity of clients and their beneficiary owners, such as copies of passports, driving licenses and other identity cards, and account files and business correspondence.

Market intermediaries can use a third party to carry out due diligence and determine the identity of clients and the beneficial owners of funds being handled by them.

While a strong defence mechanism exists in the Indian capital market regulatory system against money laundering or terror financing activities, a review became necessary to consolidate various initiatives undertaken by SEBI and the government over the years on this front.

Besides, certain changes and additional safeguards made it necessary to tackle challenges thrown up by technological and market advances and to harmonise the guidelines with new standards set by global bodies such as the FATF (Financial Action Task Force).

SEBI has studied practices followed by its peers in some countries to understand the best regulatory framework to check money laundering and terror funding.

Besides, regulators are being extra watchful because of elections and the dealings of market entities with politically exposed persons are under greater scrutiny.

SEBI mandates that market entities deploy a "high risk" approach towards such clients, including individuals entrusted with prominent public functions, heads of governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations and important political party officials.

A similar approach is needed for accounts of the family members or close relatives of politically exposed persons. 

SEBI said registered intermediaries will have 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."

The risk assessment would include, among others, any country-specific information circulated by the government and SEBI as well as an updated list of individuals and entities facing sanctions.

In a circular today, SEBI asked market intermediaries to "maintain and preserve" for five years records related to transactions, attempted or executed, that are reported to the FIU-IND (Financial Intelligence Unit - India).

As per the new norms, a company can designate its managing director or a whole-time director to ensure compliance with the regulations. A partnership firm can appoint its managing partner, while a trust can place its managing trustee as the designated director.

The director of the FIU-IND can take appropriate action, including levying a monetary penalty, on the designated director for failure of the intermediary to comply with any of the obligations, SEBI said.

The market regulator asked bourses and depositories to amend the bye-laws, rules and regulations in this regard to monitor compliance with these norms through half-yearly internal audits and inspections.

In the case of mutual funds, SEBI said compliance would be monitored by the boards of the asset management companies and the trustees.