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Policy on KYC Standard & Prevention of Money Laundering (PMLA)


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.