AML/CFT Indian Mutual Fund Industry Anti Money Laundering 3 rd - - PowerPoint PPT Presentation

AML/CFT Indian Mutual Fund Industry

Anti Money Laundering 3rd Annual Summit 3rd Annual Summit

John Mathews John Mathews HDFC Asset Management Company Limited October 23, 2013 Mumbai

About the Mutual Fund Industry About the Mutual Fund Industry

46 Asset Management Companies Average Assets: Rs 8 08 295 crore* Average Assets: Rs. 8,08,295 crore Approximately 43 million client accounts

• No. of schemes: ~750

Volumes per month: ~7.5 mn. pm (incl. S

IPs)

p p

*(as on 30 Sep 2013)

AML in the Industry – a background AML in the Industry – a background

S

EBI i l i 2006 d d ll i di i

S

EBI circular in 2006 mandated all intermediaries including Mutual Funds to formulate and implement a proper AML policy framework and also to adopt a KYC p p p y p policy

Over

the years S EBI has issued various circulars y including a Master Circular

• n

AML/ CFT dated December 31, 2010

AMFI initiated Minimum Standards Recommendation for

AML/ CFT & KYC standards

Need for compliance with PML Act and Rules

3

Basic Obligations of AMCs g

Management

Overview on KYC & S uspicious Transactions

Management

Overview on KYC & S uspicious Transactions Reporting (S TR) obligations

KYC is mandatory for all new MF investments Client Due Diligence / Enhanced Due Diligence throughout

the client relationship – Risk based approach

Monitoring of Clients of Special Categories Monitoring of Clients of Special Categories Identification of Beneficial Ownership Review of alerts/ reporting suspicious transactions to FIU-IND Record keeping/ retention of documents Internal Audit Staff hiring standards & contin o s training programs Staff hiring standards & continuous training programs

4

Know Your Customer (KYC) –

• ur

journey…

The Industry had a “ common KYC registry”

concept when it started

One KYC procedure was good enough for all Mutual Funds Perhaps the first such model Initially, KYC and PAN was mandatory for all transactions of Rs.

50,000 and above

Effective January 01

2011 KYC was made compulsory for all

Effective January 01, 2011, KYC was made compulsory for all

client categories irrespective of the investment amount

KYC Registration Agencies KYC Registration Agencies

In 2011 SEBI issued the KYC Registration Agency regulations taking In 2011, SEBI issued the KYC Registration Agency regulations taking

forward the concept of centralized KYC

Uniform KYC norms for the securities market were introduced The purpose was to have :

• Centralization of the KYC records in the securities market with access

to market intermediaries for client KYC records to market intermediaries for client KYC records

• In-person

verification

• f

the investor

• r

through authorized distributors (for MFs)

• Access to “ validated” client KYC information
• One point upload for incremental information / change in KYC data

Currently there are 5 KRAs

viz NDML CVL Karvy CAMS KRA &

Currently there are 5 KRAs, viz. NDML, CVL, Karvy, CAMS KRA &

Dotex

Challenges in KYC Challenges in KYC Challenges in KYC Challenges in KYC

The industry is largely distributor driven The industry is largely distributor driven Very low face-to-face interaction with clients Role of KRAs currently only a data repository Non-validation of client credentials with acceptable databases Income / Net worth information is declaration based Lack

• f

awareness among investors and to some extent by distributors

Pan exempt individual KYC – mechanism could be abused Pan exempt individual KYC

mechanism could be abused

Address of clients not physically verified Increase

in

• nline

transactions – access to source account information

7

Safeguards against Money Laundering Safeguards against Money Laundering

Standardized KYC process In-Person Verification No 3rd party cheques are accepted DDs accepted with banker’ s confirmation Redemption payouts to registered bank accounts only Low level of cash transactions - Rs. 20k per unit holder per fund

p p per annum

Reasonable STR norms and criteria

8

Risk Based Approach pp

A risk based approach is permitted for clients in certain special

categories

Enhanced due diligence is applicable basis client risk profile Investors are continuously reassessed for categorization into various

levels of risk viz., high, medium and low levels o s v ., g , ed u a d low

The investors who may fall in this category are:

• Non-Resident clients, High Net-worth clients

Ch GO C h l f l h h ld

• Trust, Charities, NGOs, Companies having close family shareholdings or

beneficial ownership

• Politically Exposed Persons (PEP)

Clients in high risk co ntries

• Clients in high risk countries

9

Challenges to a Risk Based Approach g pp

Monitoring transactions of PEP

• Lack of awareness – who is a PEP?
• Identifying family and close associates of PEP
• Ascertaining their source of income / wealth

Identification of Beneficial Ownership

• Insufficient public information on non listed companies / entities
• Insufficient public information on non listed companies / entities
• No centrally accessible database for trusts, NGOs etc.

10

Challenges to a Risk Based Approach… g pp

Sanction lists

• No authenticated India list of tainted individuals/ organizations
• Too many false positives based on available lists

Enhanced due diligence of clients – a daunting task

g g

Micro/ Cash investments – proliferation is possible T

i b Q lifi d F i I

Transactions by Qualified Foreign Investors Transactions by Non Profit organizations

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S i i T ti R ti Suspicious Transactions Reporting

Alerts generated basis AMFI criteria Alerts generated basis AMFI criteria Public information of names of tainted person/ entities etc. from

newspapers / websites via Google alerts

S

crubbing of investors against list of banned individuals / entities

S

crubbing of investors against list of banned individuals / entities (UNSCR 1267 / MHA etc.)

Use of commercial AML specific software and databases

l f b h

Alerts from branches, group entities etc. Clients in S

pecial Category & high-risk investors, especially PEPs

Investors in Non Cooperative Countries & Territories

p

Additional

adhoc checks like monitoring of cash transactions, investments below threshold limits, clients in particular locations, non-profit organizations etc. p g

12

F t I iti ti Future Initiatives

The industry wishes to work very closely with FIU-IND for

improving AML/ CFT safeguards

Recommendations specific to Mutual fund industry are

being finalised on the basis of the following: being finalised on the basis of the following:

• Risk assessment

R d fl i di

• Red flag indicators
• Alert Management
• Leverage on the experience and expertise of the banking industry

13

Thank you..

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