AML/CFT Indian Mutual Fund Industry Anti Money Laundering 3 rd Annual Summit 3 rd 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 p p IPs) * (as on 30 Sep 2013)
AML in the Industry – a background AML in the Industry – a background � S � S EBI EBI circular i l i in 2006 2006 mandated d d all ll intermediaries i di i 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 y years S EBI has issued various circulars including a Master Circular on 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 � Management Overview on KYC & S Overview on KYC & S uspicious Transactions 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) – our 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 � Effective January 01, 2011, KYC was made compulsory for all 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 : o 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 o In-person verification of the investor or through authorized distributors (for MFs) o Access to “ validated” client KYC information o One point upload for incremental information / change in KYC data � Currently there are 5 KRAs � Currently there are 5 KRAs, viz. NDML, CVL, Karvy, CAMS KRA & 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 of 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 online transactions – access to source account information 7
Safeguards against Money Laundering Safeguards against Money Laundering � Standardized KYC process � In-Person Verification � No 3 rd 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: o Non-Resident clients, High Net-worth clients o Trust, Charities, NGOs, Companies having close family shareholdings or Ch GO C h l f l h h ld beneficial ownership o Politically Exposed Persons (PEP) o Clients in high risk countries Clients in high risk co ntries 9
Challenges to a Risk Based Approach g pp � Monitoring transactions of PEP o Lack of awareness – who is a PEP? o Identifying family and close associates of PEP o Ascertaining their source of income / wealth � Identification of Beneficial Ownership o Insufficient public information on non listed companies / entities o Insufficient public information on non listed companies / entities o No centrally accessible database for trusts, NGOs etc. 10
Challenges to a Risk Based Approach… g pp � Sanction lists o No authenticated India list of tainted individuals/ organizations o Too many false positives based on available lists � Enhanced due diligence of clients – a daunting task g g � Micro/ Cash investments – proliferation is possible � Transactions by Qualified Foreign Investors � T i b Q lifi d F i I � Transactions by Non Profit organizations 11
S Suspicious Transactions Reporting i i T ti R ti � 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 � S crubbing of investors against list of banned individuals / entities crubbing of investors against list of banned individuals / entities (UNSCR 1267 / MHA etc.) � Use of commercial AML specific software and databases � Alerts from branches, group entities etc. l f b h � 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 Future Initiatives I iti ti � 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: o Risk assessment o Red flag indicators R d fl i di o Alert Management o Leverage on the experience and expertise of the banking industry 13
14 Thank you..
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