Introduction
The Securities and Exchange Board of India (‘SEBI’) has recently, through its Master Circular, issued the ‘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 thereunder.’ (‘New Guidelines’)[i]. The New Guideline repealed the guidelines previously issued in 2023[ii] (‘Old Guidelines’), along with amendments and directions issued to stock exchanges and the registered intermediaries[iii].
The New 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 provisions of the Prevention of Money Laundering Act, 2002 (‘PMLA’) and Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). The New Guidelines prescribe a set of rules and practices to be followed by all registered security market intermediaries under s. 12 of Securities and Exchange Board of India Act, 1992.
Key changes and implications for Intermediaries
a. Consolidation of previous guidelines with amendments
The amendments proposed in June 2023 and October 2023, along with the Old Guidelines, are consolidated in the New Guidelines. Further, the directions to stock exchanges and registered intermediaries for implementation of s. 12A of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (‘WMDDS Act’), have also been consolidated in the New above Guidelines issued by the SEBI.
b. Prescribes use of reliable and independent sources of identification and verification of Client Due Diligence
·The New Guidelines define Client Due Diligence (‘CDD’) for the first time to mean diligence carried out on a ‘client’ as defined under s. 2(1)(ha) of the PMLA by using reliable and independent sources of identification.
As per the New Guidelines, the intermediaries must now undertake a three-step verification process, wherein the intermediaries are supposed to (i) identify their clients, (ii) verify their identity using reliable and independent sources of identification, and (iii) obtain information on the purpose and intended nature of their business relationship. Further, the New Guidelines also mandate that the intermediary understand the nature of the business being conducted/undertaken by their client as a part of CDD.
c. Confidentiality in maintenance of records
The New Guidelines provide that confidentiality has to be maintained because records are being maintained under r. 3 of the PML Rules. The obligation to maintain confidentiality is upon every registered intermediary, its directors, officers, and, inter alia, all other employees. Maintenance of confidentiality as per the New Guidelines will ensure clients are not tipped off knowing the fact of maintenance of such records.
Our Analysis
The New Guidelines tighten the procedure and protocol to be followed by intermediaries in order to prevent money laundering and terrorist financing. The intermediaries must comply with the detailed guidelines provided by the New Guidelines and may implement additional disclosures to address money laundering and suspicious transactions. The intermediaries must now employ their own methods of verifying clients through independent and reliable sources. The New Guidelines are a welcome step in regulating AML and CFT transactions in India, which is in alignment with the recommendations of the Financial Action Task Force.
End Notes
[i] SEBI/HO/MIRSD/MIRSDSECFATF/P/CIR/2024/78
[ii] SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022
[iii] SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/062
Authored by Aditya Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.