A fresh set of ‘alert indicators’ have been issued by India’s financial intelligence unit (FIU) for capital markets, insurance companies, online payment gateway intermediaries and crypto currency service providers for effective checking of suspicious transactions in their channels as part of the anti-money laundering and counter-terrorism financing regime.
These new guidelines have been issued under the provisions of the Prevention of Money Laundering Act (PMLA) during the 2022-23 financial year and published in a recently released report that has been accessed by PTI.
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This is part of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime followed by the country as part of which financial institutions and intermediaries are mandated to share suspicious transaction reports (STRs) with the FIU which subsequently analyses them and shares them for action with various investigative and intelligence agencies.
FIU proactively engages with the financial sector regulators and reporting entities to understand emerging risks and to undertake immediate mitigating measures, the charter for the federal financial data mining agency says.
In the case of capital markets, these supplemental guidelines have led to “a strategic shift in the manner in which FIU received information with respect to securities market transactions,” the report said.
These ‘alert indicators’ will address “emerging risks” in the market infrastructure institutions (MIIs)– stock exchanges and depositories– like synchronised and manipulative trade practices, order spoofing, mis-utilisation of client funds by the stock brokers, suspicious off-market transactions etc.
In light of the growing trading volumes, the role the MIIs becomes “cardinal” in making the AML/CFT architecture more robust, it said.
Though the MIIs have been sending suspicious transaction reports (STRs) to the FIU for years now, the report said there was a lack of alert indicators “specific to them” and this left a lot of scope for improvement in their reporting quality, the report said.
The supplemental guidelines have specified clear areas of focus for the MIIs and it is expected that this would lead to a “marked improvement” in the reporting quality and thus will help FIU to generate meaningful intelligence for law enforcement agencies like the Income-tax department, ED, CBI, DRI etc., it said.
The new alert indicators were issued after a working group of agencies like markets regulator SEBI, FIU, stock exchanges and depositories decided to “comprehensively” revise these guidelines and change the system of only stock brokers and depository participants reporting STRs to the FIU, as they were the first point of contact for a client to access the capital markets.
For stock exchanges, the fresh alert indicators mandate they consider cases where there is suspicion of mis-utilisation of client funds by the stockbrokers such as frauds and also analyse cases where “serious anomalies” from the perspective of money laundering and terrorism financing are observed during the course of inspections and audit of stock brokers, the report said.
In the case of depositories, the new alert indicators for generating STRs require them to deal with identification of suspicious off-market transfer, a way of transferring shares directly between two accounts without the involvement of an exchange platform.
A similar working group, that included insurance regulator IRDAI, went into issues related to the insurance sector during 2022-23 fiscal and the revised guidelines laid “special stress” for generating alerts in cases of frauds experienced by the insurance firms and analyse these from the AML/CFT perspective and furnish reports to FIU in suitable cases, the report said.
In the case of online payment gateways, a working group comprising banking regulator RBI, National Payments Corporation of India (NPCI) “extensively” studied the business model of these technology-enabled financial services firms as these “new-age” players pose challenges in respect of transparency of the parties involved in transactions facilitated by them and the relative speed with which such transactions are completed, leading to emergence of AML/CFT risks.
The agency also issued alert indicators for virtual digital asset (VDA) or crypto currency service providers ranging from directions to register with the FIU to carrying out “enhanced due diligence to implementation of travel rule.”
The travel rule requires crypto currency service providers to share sender and recipient data with each other during transactions.
In the case of credit rating agencies (CRAs), the new guidelines will ensure timely reporting of STRs by them to FIU and help in identifying serious corporate frauds having AML/CFT implications in the early stages and ensure timely action by law enforcement agencies based on such financial intelligence preventing siphoning of funds by delinquent issuers, it said.
A similar set of alert indicators were issued to debenture trustees and they were directed to call for “periodic reports” from issuers of debentures and take appropriate action in the interest of the debenture holders as soon as any breach of trust deed or law comes to their notice even as the FIU said these violations may have implications from the AML/CFT perspective.
The FIU has also shared the new alert indicator guidelines for STR reporting with real estate agents categorised as designated non-financial businesses and professions (DNFBP) under PMLA.