Anti-Money Laundering (AML) compliance is a critical obligation for portfolio managers. This article explains the AML obligations and master circular references.
The Regulatory Framework
Legal Basis
Portfolio managers are subject to AML obligations under the Prevention of Money Laundering Act, 2002 (PMLA), and SEBI's Anti-Money Laundering (AML) Guidelines.
Master Circular
SEBI has issued a Master Circular on Anti Money Laundering and Combating Financing of Terrorism (AML and CFT) Standards.
Applicability
All reporting entities must comply with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA), as well as any subsequent amendments.
Key AML Obligations
KYC Compliance
Portfolio managers must:
- Conduct KYC of all clients
- Verify client identity and address
- Maintain KYC records
- Update KYC periodically
Record Keeping
Portfolio managers must maintain records of:
- All cash transactions worth more than ₹10 lakhs or its equivalent in foreign currency
- Any series of transactions that are directly or indirectly related and have a combined value greater than ₹10 lakhs
Transaction Monitoring
Portfolio managers must:
- Monitor transactions for suspicious activity
- Identify unusual patterns
- Report suspicious transactions
Reporting
Portfolio managers must:
- Report suspicious transactions to FIU-IND
- Submit STRs within 7 days of arriving at a conclusion
Principal Officer
Designation
Portfolio managers must designate a Principal Officer responsible for:
- AML compliance
- Reporting suspicious transactions
- Coordination with FIU
Responsibilities
The Principal Officer must:
- Ensure compliance with PMLA
- Review suspicious transactions
- Submit reports to FIU
- Maintain records
Client Due Diligence
Verification
Portfolio managers must independently verify compliance during onboarding and transaction approval.
Risk Assessment
Portfolio managers must:
- Assess client risk
- Apply enhanced due diligence for high-risk clients
- Document risk assessment
Ongoing Monitoring
Portfolio managers must:
- Monitor client transactions
- Update KYC periodically
- Re-assess risk
Suspicious Transaction Reporting
Identification
Portfolio managers must identify suspicious transactions, whether or not made in cash.
Reporting
Suspicious Transaction Reports (STRs) shall be submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash or a series of transactions integrally connected is of suspicious nature.
Immediate Reporting
Any suspicious transaction should be reported immediately to the Money Laundering Control Officer (Principal Officer).
Consequences of Non-Compliance
Regulatory Action
Non-compliance with AML obligations can result in:
- Enforcement action by SEBI
- Criminal prosecution under PMLA
- Monetary penalties
Reputational Damage
AML non-compliance can cause significant reputational damage.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on AML compliance for portfolio managers. Our securities law experts help clients implement compliant AML programs, conduct due diligence, and ensure regulatory compliance. Contact us for guidance on AML and other regulatory matters.