On February 3, 2023, Securities and Exchange Board of India (SEBI) published 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 there under’ vide its Master Circular SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022.

In simple words, the guidelines outline the principles and procedures for combating Money Laundering (ML) and Terrorist Financing (TF) for registered intermediaries, including branches of Stock Exchanges and their subsidiaries abroad. The guidelines are based on the Prevention of Money Laundering Act, 2002 and provide guidance on the practical implications of the statute. The registered intermediaries are expected to implement measures to identify and discourage money laundering and terrorist financing activities and to adhere to the client account opening procedures, maintenance records and reporting of transactions as prescribed by the act and rules. The Maintenance of Records Rules empower the Securities and Exchange Board of India (SEBI) to specify the information required to be maintained by intermediaries and mandate reporting entities to have an internal mechanism for detecting specified transactions and furnishing information. Violating the prohibitions on manipulative and deceptive devices, insider trading and substantial acquisition of securities or control will be treated as a scheduled offense under PMLA.

Please find below a brief overview of these guidelines:  

1. Applicability
   • These guidelines stipulate the essential principles for combating Money Laundering (ML) and Terrorist Financing (TF) and provides detailed procedures and obligations to be followed and complied with by all the registered intermediaries.
   • These guidelines shall also apply to the branches of the Stock Exchanges, registered intermediaries, and their subsidiaries situated abroad, especially, in countries which do not apply or insufficiently apply the recommendations made by the Financial Action Task Force (FATF), to the extent local laws and regulations permit. When the local applicable laws and regulations prohibit implementation of these requirements, the same shall be brought to the notice of SEBI.

2. Purpose
   • These guidelines as outlined below provide a general background and summary of the main provisions of the applicable anti-money laundering and anti-terrorist financing legislations in India. They also provide guidance on the practical implications of the Prevention of Money Laundering Act, 2002 (PMLA).
   • The guidelines also set out the steps that a registered intermediary or its representatives shall implement to discourage and to identify any money laundering or terrorist financing activities. These guidelines are intended for use primarily by intermediaries registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI Act), Stock Exchanges, Depositories and other recognised entities under the SEBI Act and Regulations and rules thereunder.

3. Implication of these guidelines on PMLA and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (Maintenance of Records Rules)

• As per the provisions of PMLA and the Maintenance of Records Rules, as amended from time to time and notified by the Government of India, every reporting entity (which includes intermediaries registered under section 12 of the SEBI Act, e. a stock-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, asset management company, depository participant, merchant banker, portfolio manager, investment adviser and any other intermediary associated with the securities market and registered under Section 12 of the SEBI Act and stock exchanges), shall have to adhere to the client account opening procedures, maintenance records and reporting of such transactions as prescribed by the PMLA and rules notified there under.
• The Maintenance of Records Rules empower SEBI to specify the information required to be maintained by the intermediaries and the procedure, manner and form in which it is to be maintained. It also mandates the reporting entities to evolve an internal mechanism having regard to any guidelines issued by the regulator for detecting the transactions specified in the Maintenance of Records Rules and for furnishing information thereof, in such form as may be directed by SEBI.
• The PMLA inter alia provides that violating the prohibitions on manipulative and deceptive devices, insider trading and substantial acquisition of securities or control as provided in Section 12A read with Section 24 of the SEBI Act will be treated as a scheduled offence under schedule B of the PMLA.

Conclusion  

It is acknowledged that a universal approach may not be suitable for the securities sector in India. Thus, each registered intermediary is responsible for taking into account their unique business characteristics, such as their organizational structure, clients, and transactions, when implementing the proposed measures and procedures. The overriding principle is that they shall be able to satisfy themselves that the measures taken by them are adequate, appropriate and abide by the spirit of such measures and the requirements as enshrined in the PMLA.

This update has been contributed by Namitha Mathews (Partner) and Anukriti Goswami (Associate).

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