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Policy on KYC Standard & Prevention of
Money Laundering (PMLA)
INDEX
1 Preamble
2 Objective, Scope & Application
3 Definition of Money Laundering
4 Obligations under Prevention of Money Laundering Act, 2002
5 Money Laundering – Risk Perception
6 Definition of a Customer
7 Customer Due Diligence
7.1 Customer Acceptance Policy
7.2 Customer Identification Procedures
7.3 Classification of Accounts
7.4 Closure of Accounts
7.5 Risk Management
8 Monitoring and Reporting of Transactions
9 Maintenance of Records
10 Employee Training
11 Recruitment / Hiring of Employees
12 Principal Officer
13 Review of the Policy
1. Preamble
Securities Exchange Board of India has been issuing guidelines in
regard to Know Your Customer(KYC) standards to be followed by
Intermediaries of the exchanges and the measures to be taken in
regard to Anti Money Laundering(AML) and Combating Financial
Terrorism(CFT). The guidelines incorporate the:
• Obligations cast on intermediaries under the Prevention of Money
Laundering Act(PMLA), 2002
• Recommendations made by the Financial Action Task Force(FATF) on
AML standards and CFT
Trading Members are required to put in place a comprehensive policy
framework, duly approved by Board of Directors, in this regard. This
policy document has been prepared in line with the SEBI guidelines
and incorporates the Member’s approach to KYC, AML and CFT issues.
2. Objectives, Scope and Application of
the Policy :
The primary objective of the Policy is to prevent the Member from
being used, intentionally or unintentionally, by criminal elements
for money laundering. Purposes proposed to be served by the policy
are :
i. To prevent criminal elements from using the Member for money
laundering activities
ii. To enable the member to know/understand the customers and their
financial dealings better which, in turn, would help the Member to
manage risks prudently.
iii. To put in place appropriate controls for detection and
reporting of suspicious activities in accordance with applicable
laws/laid down procedures.
iv. To comply with applicable laws and regulatory guidelines.
v. To ensure that the concerned staff are adequately trained in
KYC/AML procedures.
This Policy is applicable to all branches of the Member and is to be
read in conjunction with related operational guidelines issued from
time to time.
3. Definition of Money Laundering
Section 3 of PMLA has defined the “offence of money laundering “ as
under:
“Whosoever directly or indirectly attempts to indulge or knowingly
assists or knowingly is a part or is actually involved in any
process or activity connected with the proceeds of crime and
projecting it as untainted property shall be guilty of money
laundering”.
Money Launderers use the Intermediaries for cleansing ‘dirty money’
obtained from criminal activities with the objective of hiding /
disguising its source. The process of money laundering involves
creating a web of financial transactions so as to hide the origin
and true nature of these funds.
For the purpose of this document, the term money laundering would
also cover financial transactions where the end use of funds goes
for terrorist financing irrespective of the source of the funds.
4. Obligations under Prevention of
Money Laundering Act, 2002
Section 12 of PMLA places certain obligations on every banking
company, financial institution and intermediary, which include
i. Maintaining a record of prescribed transactions
ii. Furnishing information of prescribed transactions to the
specified authority
iii. Verifying and maintaining records of the identity of its
clients
iv. Preserving records in respect of i , ii and iii above for a
period of ten years from the date of cessation of transactions with
the clients
These requirements have come into effect from the 1St July, 2005
i.e. the date on which PMLA was notified by the Government of India
and rules frames there under.
5. Risk Perception
Non compliance with KYC standards, use of the portals of the Member
for Money Laundering activities expose the Member to various risks,
such as Operational Risk, Reputation Risk, Compliance Risk and Legal
Risk etc.
6. Definition of a Customer
A customer, for the purpose of the policy is defined as:
i. A person or an entity that maintains an account and/or has a
business relationship with the Member
ii. one on whose behalf the account is maintained
iii. beneficiaries of transactions conducted by professional
intermediaries, such as Stock Brokers, Chartered Accountants,
Solicitors etc. as permitted under the law, and
iv. any person or entity connected with a financial transaction.
7. Customer Due Diligence
The Policy of the Member has the following key elements:
• Customer Acceptance Policy
• Customer Identification Procedures
• Classification of Accounts
• Closure of Accounts
• Risk Management
7.1 Customer Acceptance Policy
Member’s Customer Acceptance policy lays down the criteria for
acceptance of customers. The guidelines in respect of the customer
relationship in the Member broadly are:
i. Accept customers only after verifying their identity.
ii. Classify customers into various risk categories and, based on
risk perception, apply the acceptance criteria for each category of
customers.
iii. Documentation requirements and other information to be
collected, as per PMLA and SEBI guidelines/instructions, to be
complied with
iv. Not to open an account or close an existing account ( except as
provided in paragraph 7.4 of this policy), where identity of the
account holder cannot be verified and/or documents/information
required could not be obtained/confirmed due to non-cooperation of
the customer
v. Identity of a new customer to be checked so as to ensure that it
does not match with any person with known criminal background or
banned entities such as individual terrorists or terrorist
organizations etc.
vi. Implementation of Customer Acceptance Policy should not become
too restrictive and result in denial trading services to general
public, especially those who are financially or socially
disadvantaged.
7.2 Customer Identification Procedures
Customer identification requires identifying the customer and
verifying his/her identity by using reliable, independent source
documents, data or information. Thus, the first requirement of
Customer Identification Procedures (CIP) is to be satisfied that a
prospective customer is actually who she/he claims to be. The second
requirement of CIP is to ensure that sufficient information is
obtained on the identity and the purpose of intended nature of the
trading relationship. This would enable risk profiling of the
customer and also to determine the expected or predictable pattern
of transactions. Identification data such as Address/location
details and Recent photograph would be obtained.
Wherever applicable, information on the nature of business activity,
location, mode of payments, volume of turnover, social and financial
status etc. will be collected for completing the profile of the
customer.
7.3 Classification of Account
Clients will be categorized on various grounds like
client’s location (registered office address, correspondence
addresses and other address if any applicable, nature of business
activity, trading turnover etc and manner of making payment for
transactions undertaken.
Client accounts can be classified into following three categories:
• Low Risk Clients
• Medium Risk Clients
• High Risk Clients
7.3.1 Low risk Clients
Low risk client includes clients who satisfy following criteria:
One who provides all documents at the time of account opening
without any delay?
• Resident of India
• Proofs verified with originals
• Provides income proof
• Providing references
• No delegation of authority for operation of account
• Always provide securities and funds in time
• Places order within reasonable period of time
7.3.2 Medium Risk Clients
Any client who cannot be comfortably placed in neither
in low risk nor in high risk category.
7.3.3 High Risk Clients
High risk clients includes all clients mentioned under Special
category of clients and any client against whom any order is passed
by regulatory authorities or any investigation is launched which is
pending. Any client against whom any regulatory order is passed for
accessing market then such client will automatically be black listed
and no further trading should be done for those accounts.
Clients of special category (CSC):
i. Nonresident clients
ii. High net worth clients
iii. Trust, charities, NGOs and organizations receiving donations
iv. Companies having close family shareholdings or beneficial
ownership
v. Politically exposed persons of foreign origin
vi. Current / Former Head of State, Current/Former Senior High
Profile politicians and connected persons.
Further client once categorized as low risk client can be later
categorized as high risk or vice versa depending on the nature of
transactions and client behavior and periodical report of his/her
client.
Also persons acting on behalf of client, proper verification of
person’s authority to act on behalf of client should be done.
7.4 Closure of Account
Where the appropriate KYC measures could not be applied due to
non-furnishing of information and/or non-cooperation by the client,
the account can be considered for closure or terminating the
business relationship. Before exercising this option, all efforts
will be made to obtain the desired information and, in event of
failure, due notice, will be given to the clients explaining the
reasons for taking such a decision. In all such cases, the
controlling authority at the Head Office shall be the competent
authority to permit closure of accounts.
7.5 Risk Management
While the Member has adopted a risk-based approach to the
implementation of this Policy, it is necessary to establish
appropriate framework covering proper management oversight, systems,
controls and other related matters.
Member’s Internal Audit of compliance with KYC/AML Policy will
provide an independent evaluation of the same including legal and
regulatory requirements. Concurrent/ Internal Auditors shall
specifically check and verify the application of KYC/AML procedures
at the Head Office and comment on the lapses observed in this
regard.
The Principal Officer designated by the Member in this regard will
have overall responsibility for maintaining oversight and
coordinating with various functionaries in the implementation of
KYC/AML/CFT policy.
However it is the duty of every client manager / sales person to
satisfy himself about the financial soundness and investment
objectives of client. Every client manager / sales person should
carry on independent grading of his/her client on periodical basis (
12 or 18 months) and intimate Compliance department of his finding
highlighting adverse change in grading.
Portfolio/Investment size/order sizes are commensurate with annual
income disclosed by client. Sources of fund disclosed by the client
should be verified. Also, maintain continuous familiarity and follow
up with clients where any inconsistency in the information is
provided.
Back office members should inform Operations head who in turn will
inform the Principal Officer about any transaction which is
inconsistent with client regular trading activity or if funds and
securities are coming from account other then account specified by
client or if they receive request to transfer fund or security to
account other than designated account.
Stop continue to do business with client doing suspicious
transaction and inform compliance department for further reporting
of suspicious activity to authorities. Never make client aware of
your suspicion.
8. Monitoring and Reporting of
Transactions
Monitoring of transactions will be conducted taking consideration
the risk profile of the account.
• Any transaction of retail clients of value exceeding 10 lacs
should be reported to compliance department if it’s an irregular
transaction. Transaction is irregular (i) if the size of order is
not commensurate with client income level disclosed or if it’s more
than his usual order size. (ii) if the order is placed by dormant
client i.e. order placed by client after a period of 1 year from
his/her transaction.
• Any transaction which does not make economic sense or is complex
or unusually large should be immediately brought to the notice of
the compliance department.
• All documents, slips, recordings etc. related to any suspicious
transactions should be preserved as per record keeping policy.
• Compliance Department will do random checking from transaction
value of which exceeds 10 lacs on monthly basis and report its
finding to management and if necessary to relevant authorities.
• Any transaction/ order which arises the suspicion of any employee
should be diligently and immediately informed to compliance
department.
• Requests to transfer money or securities to third parties with or
without any known connection to our customers.
• The transaction is not settled in the normal manner, e.g., an
offer to settle in cash or settlement by registration or delivery of
securities to a third party.
• Unusually large cash deposits made by an individual or business.
• Clients transferring large sums of money to or from overseas
locations.
• The transaction is unusual, e.g., with respect to normal market
size and frequency.
• The transaction is not in keeping with the counterparty’s normal
activity.
Any suspicion transaction should be immediately notified to the
Compliance Officer/Principal officer or any other designated officer
within the intermediary. The notification may be done in the form of
a detailed report with specific reference to the clients,
transactions and the nature /reason of suspicion. However, it should
be ensured that there is continuity in dealing with the client as
normal until told otherwise and the client should not be told of the
report/suspicion. In exceptional circumstances, consent may not be
given to continue to operate the account, and transactions may be
suspended, in one or more jurisdictions concerned in the
transaction, or other action taken.
After due diligence at the appropriate level in the intermediary,
transactions of suspicious nature and/or any other type of
transaction notified under PMLA will be reported by the Principal
Officer to Financial Intelligence Unit – India (FIU-IND), the
appropriate authority. A record of such transactions will be
preserved and maintained for the period as prescribed in PMLA.
9. Maintenance of Records
All documents should be preserved for 5 years as per SEBI Act this
includes books of accounts, agreements, duplicate copies of contract
notes, recorded messages, order books
Provided for active account documents like KYC, agreement,
passports, PAN card copy, driving license, bank letter etc should be
preserved permanently
Further provided that if any proceeding is pending against Tradehifi
Stock Broking Pvt Ltd conducted by any authorities these documents
should be preserved till the disposition of proceeding i.e. until it
is confirmed that case is closed.
Provided further that in case account is closed if it was inactive
for X no. of years then documents should be maintained for 5 years
from date of closure
For accounts which are freezed on our own account or on receiving
order from authorities all document should be preserved until final
disposition of case to the satisfaction of authorities.
Maintain records e.g. order slip or any piece of document which in
future can help in reconstruction of individual transaction.
To provide audit trails to authorities for potential money
laundering activities following information’s should be retained for
reasonable period of time:-
i. Beneficial owner of account
ii. Volume of fund flowing through account
iii. For selected transactions
The origin of funds
Form in which fund was offered
Form in which fund was withdrawn e.g. cash, cheques etc.
Identity of person taking transaction
Destination of fund and securities
Form of instruction and authority
10. Employee Training
Every employee must undergo anti money laundering training within a
week of joining the firm. It is the duty of the Head Office to
ensure that every new recruit and employee have undergone training
in KYC standards/AML/CFT Measures so that members of the staff are
adequately trained in KYC/AML/CFT procedures.
11. Recruitment / Hiring of Employees
KYC norms/ AML standards / CFT measures have been
prescribed to ensure that criminals are not allowed to misuse
channels of the Member. Member will put in place necessary and
adequate screening mechanism as an integral part of its
recruitment/hiring process of personnel. Further no candidate should
be selected who has ever been convicted of offence under Money
Laundering Act or any other civil or criminal Act.
12. Principal Officer
The Compliance Officer shall be the Principal Officer for
KYC/AML/CFT matters who shall be responsible for implementation of
and compliance with this policy. His illustrative duties, in this
regard, will be (i) Overall monitoring of the implementation of the
Member’s KYC/AML/CFT policy (ii) Monitoring and reporting of
transactions and sharing of information as required under the law.
13. Review of the Policy
The policy will be reviewed as and when considered necessary by the
Board.
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