INTRODUCTION
The Securities and Exchange Board of India (‘SEBI’), through its Master Circular dated June 06, 2024, issued ‘Guidelines on Anti-Money Laundering (“AML”) Standards and Combating the Financing of Terrorism (“CFT”)/ Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002,’ (“Master Circular/2024 Guidelines”),[1] emphasising the need for stricter AML/ CFT measures in the securities market, given global efforts against drug trafficking, terrorism, and other serious crimes. The 2024 Guidelines supersede the SEBI AML/ CFT Guidelines of February 03, 2023 (“2023 Guidelines”),[2] strengthening the obligations of market intermediaries and aligning with international standards from the Financial Action Task Force (“FATF”).
The 2024 Guidelines provide for mandatory adherence to client account opening procedures, maintenance of records by the intermediaries, risk management and reporting of transactions, and serve as the foundation of preventing money laundering and terrorist financing activities as per the provisions of the Prevention of Money Laundering Act, 2002 (‘PMLA’) and Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’).
In this blog, we shall examine the scope and purpose of the 2024 Guidelines, along with the obligations of stakeholders, and the notable shifts from its predecessor 2023 Guidelines.
SCOPE OF APPLICATION
The 2024 Guidelines apply to all intermediaries registered under the SEBI Act, 1992 (“SEBI Act”), including stockbrokers, investment advisors, and stock exchanges, while also extending to branches and subsidiaries of intermediaries in non-FATF countries.
OBLIGATIONS OF INTERMEDIARIES UNDER THE 2024 GUIDELINES
Apart from the obligations detailed below, the registered intermediaries may, according to their requirements, also specify additional disclosures to be made by clients to address the concerns of money laundering and suspicious transactions undertaken by clients.
- Establishing Internal Mechanisms: The 2024 Guidelines reiterate that every intermediary shall ensure that the senior management of a registered intermediary must establish appropriate written policies and procedures to implement the provisions of the PMLA which, inter alia, shall include (i) policy for acceptance of clients; (ii) procedure for identifying clients; (iii) risk management; and (iv) monitoring of transactions during the Client Due Diligence (“CDD”) process. Further, the senior management should also ensure that the contents thereof are understood by all staff members.
- Carrying Customer Due Diligence: SEBI permits intermediaries to frame their internal directives following KYC norms for Client Identification Procedure (“CIP”), which must be carried out as provided in the Know Your Customer (“KYC”) policy of the intermediary and KYC norms specified by SEBI from time to time. The registered intermediaries must also develop client acceptance policies and procedures to identify the types of clients with higher risk of money laundering and terrorist financing. Enhanced due diligence measures are to be undertaken for Clients of Special Category (“CSC”), which includes non-resident or high net worth clients, trusts, charities, non-governmental organisations, companies having close family shareholdings or beneficial ownership, PEPs, clients in high-risk countries, non-face to face clients and clients with a dubious reputation. CIP may be undertaken while establishing intermediary-client relationship, carrying out transactions for the client or when the intermediary is sceptical of the data previously obtained from the client. Registered intermediaries may rely on third parties for CDD processes, including client identification, verification, and beneficial ownership checks. The registered intermediary is required to ensure that the third party is regulated, supervised, or monitored, and complies with CDD and record-keeping requirements. These engaged third parties must not be based in high-risk countries and are subject to the provisions of the PMLA.
- Risk Management Obligations: The 2024 Guidelines mandate a risk-based approach for intermediaries to mitigate and manage identified risks. Intermediaries must conduct risk assessments to identify, assess, and mitigate money laundering and terrorist financing risks related to clients, geographical areas, transaction nature, volume, and payment methods. This assessment must be documented, regularly updated, and available to competent authorities and self-regulating bodies upon request
- Suspicious Transaction Monitoring and Reporting: The 2024 Guidelines obligate registered intermediaries to identify and report suspicious transactions. Upon suspicion, the intermediary must immediately notify the Designated/ Principal Officer with a detailed report, referencing clients, transaction, and nature of suspicion. The Designated Officer must have timely access to client identification and CDD data, transaction records, and other relevant information. For clients in high-risk countries, intermediaries may also implement appropriate countermeasures.
- Record Management: Registered intermediaries must maintain records of the nature, value, date, and parties involved in each transaction. They are also required to adhere to record-keeping obligations as stipulated in the SEBI Act, its rules and regulations, PMLA, as well as other relevant legislation, rules, regulations, exchange bylaws, and circulars. These records must be maintained for atleast five years from the transaction date or until the conclusion of any related investigations.
2024 GUIDELINES VS. 2023 GUIDELINES
The 2024 Guidelines significantly align with the PMLA framework, expanding the scope of application of the rules, compared to the 2023 Guidelines. SEBI has introduced the following changes and obligations in the 2024 Guidelines to further strengthen its AML/ CFT regime:
- Group-Wide Policies: The 2023 Guidelines applied to all SEBI-registered intermediaries and their overseas branches and subsidiaries, subject to local laws. The 2024 Guidelines reiterate previous applicability, while introducing specific obligations for financial groups. It mandates group-wide AML/CFT programmes, including policies and programmes for sharing information required for CDD and money laundering and terrorist financing risk management, group-level compliance and adequate safeguards on confidentiality and use of information exchanged.
- Client Due Diligence (CDD) Thresholds and Definitions: According to the 2023 Guidelines, beneficial ownership thresholds were set at 25% for companies and 15% for partnerships or other entities. However, the 2024 Guidelines have changed the thresholds. These thresholds have been reduced to 10% for both companies and partnerships.
- Compliance with WMD Act: The 2024 Guidelines include new directions enforcing the Ministry of Finance’s January 30, 2023, order[3], implementing Section 12A of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (“WMD Act”). Section 12A empowers the Central Government to freeze, seize, or attach funds or financial assets connected to individuals financing prohibited activities under the WMD Act, the United Nations (Security Council) Act, 1947, or other applicable laws. Stock exchanges and intermediaries must maintain a “Designated List” and verify transacting parties against it. In the event of a match, stock exchanges and intermediaries are prevented from carrying out such transactions, and the particulars of the same are informed to FIU-India without delay.
CONCLUSION
The 2024 Guidelines have notably evolved from the 2023 version, by introducing group-wide compliance measures, stricter adherence to PMLA provisions, and a renewed focus on combating AML/CFT. Recognising that uniform guidelines may be impractical due to varying business natures, organisational structures, client types, and transactions, the 2024 Guidelines allow intermediaries flexibility in implementing the suggested changes and procedures. The guidelines’ core principle is for intermediaries to be satisfied with their own PMLA compliance measures. The 2024 Guidelines are a welcome step toward regulating AML and CFT transactions in India, which is in alignment with the recommendations of the FATF.
For further information, please contact:
Sara Sundaram, Partner, Cyril Amarchand Mangaldas
sara.sundaram@cyrilshroff.com
[1] Securities and Exchange Board of India [SEBI], Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there unde., SEBI/HO/MIRSD/MIRSDSECFATF/P/CIR/2024/78 (2024).
[2] Securities and Exchange Board of India [SEBI], Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed there under, SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022 (2023).
[3] Ministry of Finance, Implementation of Section 12A of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005: Designated List (Consolidated), F. No. P-12011/14/2022-ES Cell-DOR (2023).
