SEBI Notifies modifications to Master Circular on Anti-Money Laundering/Combating the Financing of Terrorism

On Wednesday, 12^th March, 2014, Securities and Exchange Board of India (“SEBI”) has notified a circular through which the Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT), issued on December 31, 2010 (“Master Circular”), has been modified. The circular, issued in view of the amendments to the Prevention of Money-laundering Act, 2002 (“PML Act”) and related rules, has modified the obligations of intermediaries with respect to risk assessment, recording keeping requirement etc. Following points provide a brief overview of the modifications, as stipulated under the circular:

1.Risk Assessment: In clause 5 (Client Due Diligence), Part II (Detailed Directives), of the Master Circular, a new sub-clause (5.3.2.) has been inserted which requires the registered intermediaries to carry out risk assessment for mitigating its money laundering and terrorist financing risk w.r.t. its clients, countries or geographical area etc. The risk assessment, carried out by the concerned intermediary, shall be updated regularly.

2.Reliance on Third Party for carrying out Client Due Diligence (“CDD”): Again in clause 5, Part II, of the Master Circular, a new sub-clause (5.6) has been inserted to allow registered intermediaries to rely on third party for identification and verification of the client, including the determination as to whether client is acting on behalf of a beneficial owner. Such third party should be regulated and supervised; however, the ultimate responsibility for CDD and due diligence will be that of the registered intermediary.

3. Record Keeping Requirements: Instead of maintaining and preserving transaction records for ‘ten years’ from the date of cessation of the transactions with clients, intermediaries will now have to maintain transaction records, including that of unusual and complex transactions, for a period of ‘five years'. Intermediaries will also have to maintain and preserve records evidencing the identity of clients and the beneficial owners (apart from maintain records of concerned account files and business correspondence). They will have to maintain and preserve records of documents such as passports, driving licenses etc.).

4.Records of ‘Reported Transactions: A new sub-clause (8.5) has been inserted which requires registered intermediaries to maintain and preserve records of transactions (attempted or executed), reported to Director or Financial Intelligence Unit, for a period of period of ‘five years’.

5.Appointment of ‘Designated Director’: Through the insertion of a new sub-clause (14.2), registered intermediaries will now be required to designate a person a ‘Designated Director’. For example, in case of a partnership firm, managing partner will be the designated director. Appropriate action can be taken against Designated Director, if the intermediary fails to comply with its AML/CFT obligations.

Pursuant to this notification, Stock Exchanges and Depositors are required to bring provisions of the circular to the notice of stock brokers and depository participants, as the case may be. In addition, they are required to make appropriate amendments to their bye-laws, rules etc. In case of Mutual Funds, compliance of this circular will be monitored by the concerned authority (mentioned in the circular).