Table of Contents
Chapter 6: SEBI Guidelines for Anti Money Laundering (AML) Standards, Combating the Financing of Terrorism (CFT) and Proliferation Financing (PF)
6.1 SEBI AML Master Circular: Board Governance, Designated Director & Principal Officer Roles
The Regulatory Framework of the SEBI AML Master Circular
To ensure uniform, market-wide implementation of PMLA and PML Rules across all registered intermediaries, SEBI periodically consolidates and updates its comprehensive directive: the SEBI Master Circular on Anti-Money Laundering (AML) Standards, Combating the Financing of Terrorism (CFT) and Proliferation Financing (PF).
The Master Circular binds all stockbrokers, depositories, mutual funds, portfolio managers, alternative investment funds, and market infrastructure institutions under Section 11(1) of the SEBI Act, 1992.
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| INSTITUTIONAL AML GOVERNANCE PYRAMID |
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| BOARD OF DIRECTORS |
| - Sets tone at the top; approves comprehensive written AML/CFT/PF policy |
| - Appoints Designated Director and Principal Officer |
| - Reviews semi-annual AML audit findings and compliance reports |
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| DESIGNATED DIRECTOR | | PRINCIPAL OFFICER |
| - Whole-time Director / Managing Director | | - Senior Management official (Exec. level)|
| - Ultimate legal accountability under PMLA Sec 13 | | - Independent from business & dealing |
| - Ensures allocation of compliance budgets & tech | | - Direct, exclusive channel to FIU-IND |
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Statutory Roles and Fiduciary Duties of Key Appointments
1. The Designated Director (Section 13 of PMLA)
- Must be a Whole-time Director, Managing Director, or Partner (in a partnership firm).
- Bears ultimate statutory legal liability if the intermediary fails to maintain records, implement CDD, or report transactions to FIU-IND.
- In the event of persistent institutional non-compliance, the Director, FIU-IND can levy financial penalties directly against the Designated Director personally and bar them from serving on financial boards.
2. The Principal Officer
- Must be a senior management professional possessing sufficient seniority, independence, and technical knowledge of AML laws and capital market operations.
- Operational Independence: Must not be assigned sales, brokerage revenue targets, or trading responsibilities to prevent conflicts of interest.
- Exclusive Authority: Possesses unhindered, unrestricted access to all client trading data, demat transaction registers, and internal employee files.
- Reporting Autonomy: Submits STRs, CTRs, and CBWTRs directly to FIU-IND without requiring prior clearance from sales managers, the CEO, or commercial directors.
6.2 Written Internal AML Policies: Client Acceptance, Identification, and Red Flag Indicators
Core Components of Written AML Procedures
Every registered securities intermediary must formulate and implement a comprehensive, board-approved written AML/CFT/PF Policy Manual structured around three fundamental operational pillars:
- Client Acceptance Policy (CAP)
- Client Identification Procedures (CIP)
- Transaction Monitoring and Red Flag Management
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| CLIENT ACCEPTANCE POLICY (CAP) PILLARS |
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| Prohibition on | Strictly ban opening anonymous accounts, fictitious accounts, or accounts in |
| Ghost Accounts | the names of untraceable shell entities |
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| Screening Against | Automatic rejection of any applicant matching UNSC, MHA, or UAPA sanction lists|
| Sanctions Lists | prior to opening an account or executing any trade |
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| Risk-Graded | Mandatory classification of all clients into Low, Medium, or High Risk tiers |
| Acceptance | based on transparent, documented scoring parameters |
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| Non-Cooperation | If an applicant refuses to submit authentic OVDs, tax PAN, or disclose true |
| Refusal | UBO ownership, the account MUST be denied and an STR considered |
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Red Flag Indicators in Securities Market Operations
Intermediaries must train dealers, compliance officers, and operations staff to recognize suspicious patterns ("Red Flags") across trading and funds flows:
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| SECURITIES MARKET RED FLAG INDICATORS MATRIX |
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| Funds & Banking | - Large sudden cash deposits into trading accounts via third-party banks |
| Red Flags | - Multiple unrelated accounts receiving funds from an identical bank account |
| | - Immediate request to transfer funds to a third party upon stock sale |
| | - Frequent wire transfers to/from high-risk offshore tax havens |
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| Trading Activity | - Unusual, unexplained trading volume in illiquid penny / micro-cap stocks |
| Red Flags | - Consistent trading at prices deviating sharply from prevailing market quotes |
| | - Synchronized circular trading / reversal trades in illiquid stock options |
| | - Sudden massive activity in dormant accounts followed by immediate withdrawal|
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| Client Behavior | - Client shows zero concern regarding execution prices, commissions, or losses|
| Red Flags | - Reluctance to disclose natural UBO beneficial owners behind offshore trusts |
| | - Inability to explain source of wealth relative to declared annual income |
| | - Excessive nervousness or aggressive pushback during digital VIPV checks |
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6.3 Suspicious Transaction Monitoring, FIU-IND Reporting Architecture, Staff Training, and Internal Audit
Automated Transaction Monitoring Systems
Given the millions of trades executed daily across the National Stock Exchange (NSE) and BSE Limited, manual trade monitoring is impossible. SEBI mandates that intermediaries deploy Automated AML Surveillance Systems:
- Systems ingest daily exchange trade logs, demat transfer registers, and banking ledgers.
- Rules-based engines generate automated exception alerts (e.g., sudden $10\times$ volume spike, wash sales, rapid cash turnover).
- Alert Triage Workflow: Compliance analysts examine generated alerts, verify trading rationales, and either close false positives with documented justification or escalate valid alerts to the Principal Officer.
Exchange Daily Trade Feeds ---> Automated AML Rule Engine ---> Exception Alert Triggered
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Alert Closed (Legitimate trade documented) <--- Analyst Review <------+
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Escalate to Principal Officer
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Conclusion of Suspicion Formed
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File STR on FINnet within 7 WORKING DAYS!
The Strict Non-Disclosure / "No Tipping-Off" Rule
Section 14 of PMLA and SEBI guidelines strictly enforce the No Tipping-Off rule:
- Neither the Principal Officer, Designated Director, nor any employee shall disclose or hint to the client or any external third party that their account is under AML surveillance or that an STR has been filed with FIU-IND.
- Tipping off a suspect allows criminals to destroy evidence, empty bank accounts, or flee jurisdiction. Breaching this rule constitutes a serious criminal violation under PMLA.
Internal Audit and Independent Testing
To ensure the AML defense remains airtight:
- Periodic Internal Audit: The intermediary's internal audit department (or an independent practicing Chartered Accountant) must conduct comprehensive AML audits every six (6) months.
- Scope of Audit: Tests the effectiveness of automated monitoring systems, sample-checks CDD/KYC files, inspects alert resolution timelines, and verifies STR filing logs.
- Reporting to Board: The AML audit findings must be placed directly before the Audit Committee or Board of Directors for corrective action.
Ongoing Employee Training and Sensitization
- Intermediaries must conduct periodic mandatory training programs for all front-office dealers, relationship managers, and back-office settlement staff.
- Frontline staff are the first line of defense; they must be trained to identify emerging laundering typologies (cryptocurrency laundering, shell accounts) and report internal suspicions promptly to the Principal Officer.