Watchdog penalty on NSEL raises investors' hopes

FIU finds evidence of wilful violation and intention to avoid being regulated; exchange slams order as 'flawed', 'bad in law'

The Financial Intelligence Unit-India (FIU) has held the National Spot Exchange Ltd (NSEL) guilty of several violations of the anti-money laundering law, issuing a penalty order that some investors say is as significant as that of the Forward Markets Commission (FMC) in December 2013.
The black-money watchdog has slapped a penalty of ~1.66 crore for several counts of violating provisions of the Prevention of Money Laundering Act (PMLA).
NSEL has moved the appellate tribunal against the order, calling it flawed and bad in law. But, NSEL Investors Forum (NIF), a body representing 13,000 victims of the ~5,600-crore payment crisis in NSEL, said it welcomes the order and asked the Union ministry of corporate affairs, which is considering a proposal to merge the defunct bourse with its cash-rich parent Financial Technologies (India) Ltd (FTIL), to take cognisance of the order.

Section 12 of the PMLA and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, framed under the PMLA, impose on all reporting entities obligations that include maintaining prescribed records of specified transactions, appointing a principal officer and a designated director, performing client due diligence and furnishing to director, FIU, prescribed reports including reports on suspicious transactions (STRs).
FIU held that NSEL came under the purview of the Forward Contracts (Regulation) Act (FCRA) and, therefore, was guilty of failing in several of these obligations under the law. The watchdog further held that the failures were deliberate and wilful and, hence, invited penalties. NSEL has been fined ~1 lakh for each failure and the collective fine was ~1.66 crore.

“The order clearly proves the wilful negligence in proper safety and security of investors as well as following proper procedures of governance,” Chairman of NSEL Investors Forum Sharad Kumar Saraf said in an emailed statement. “The investors hope that the government of India will take cognisance of the order and issue the merger order before the deadline of February 15, 2016. NIF further urges the government to invoke PMLA and take necessary actions to recover the funds of investors,” Saraf added.

In response to an email seeking comments sent on Thursday, NSEL said, “In our understanding FIU India has coined a new term, ‘deemed intermediary’, and based on this hitherto unknown term, in the parlance on PMLA, has wrongly assumed NSEL to be a ‘recognised’ and ‘registered association’ and to be a ‘reporting entity’ as per the Forward Contracts (Regulation) Act, 1952.”

NSEL added, “Going further, FIU served a notice on NSEL and its ex-non-executive/independent directors and key officials, holding office from mid-February and September of 2013.”
The exchange has contended that the assumption of FIU India is deeply flawed and reiterated the exemptions NSEL was granted under Section 27 of the FCRA. “Notwithstanding our response, FIU has passed an order of penalty on NSEL on misconceived understanding and assumptions. The impugned order is bad in law and is against the principles of natural justice. We have appealed against the said impugned order and in the appellate tribunal. We are happy to have received a favourable response from the appellate authority. The matter is pending for further hearing.”

Of the penalty, a substantial portion of ~1.34 crore was on account of non-submission of STRs in respect of 134 contracts.
“NSEL failed to fulfil its obligations under the PMLA by not evolving a mechanism for detecting and furnishing suspicious transaction reports, resulting in failure to examine 134 contracts that were in operation during the period from February 15, 2013, to July 31, 2013,” said the FIU order. It came after several oral and written submissions including hearing NSEL representatives Ashish Kakade, vice-president, P R Ramesh, advocate, last September.
One of the arguments of NSEL was that it was neither registered nor recognised under FCRA and, hence, was not a reporting entity. FIU found this invalid and unacceptable. “NSEL was undertaking activities that required recognition and registration. Recognition and registration are granted on the application of the entity carrying on those activities. In order to carry on those activities in a legitimate manner, it was incumbent on NSEL to take action for recognition or registration under the FCRA,” the FIU said in the November order.

The watchdog further held that NSEL cannot claim immunity or cannot be absolved of its obligations under the PMLA merely on the ground that it was not recognised or registered under the FCRA, as it deliberately chose to carry out activities for which it was not authorised. According to the FIU order, this deliberate act of avoidance of law was mala-fide as NSEL’s own admissions showed that it was aware of the risk of money laundering inherent in its operations as well as in the operations of its members.
On the exchange’s contention that there was no mens rea (criminal intent), FIU said, “It is amply clear from NSEL’s own admission that it was aware that the operations of NSEL and its members were vulnerable to money laundering and financing of terrorism… NSEL has not produced any evidence of any consultation with any authority including its regulator or FIU-IND as to whether it was obligated under the PMLA. What is striking is that this was done fully knowing that the operations of NSEL and its members were vulnerable to money laundering. Therefore, the mens rea is evident.”

FIU further added: “It appears that NSEL was more concerned about interpreting the laws, etc. in a manner that would give it a reason to avoid being regulated or furnishing any reports rather than serving the public interest.” NSEL’s persistent refusal to furnish to FIU routine information, despite repeated requests, including on its directors and senior management, and submit to the other requirements of law was also viewed adversely by the body.
FIU saw ample evidence of wilful violation of law and, therefore, said NSEL could not be let off with a penalty that should normally be imposed for minor violations. “Considering that these failures were deliberate and wilful and keeping in mind that the penalties have to be effective, proportionate and dissuasive, I hereby impose a fine of ~1 lakh for each failure,” FIU director Praveen Kumar Tiwari said in the order.

In December 2013, FMC, then the regulator of commodities markets, had declared FTIL and its top executives including founder Jignesh Shah not “fit and proper” to run exchanges for their role in NSEL. The findings and directions of this order, challenged by FTIL and Shah, have become the basis of proceedings by several other agencies and regulatory bodies.


NSEL’s violations:

• Failure to register as a reporting entity with Financial Intelligence Unit-India
• Not appointing a designated director and a principal officer
• Not furnishing any report as required under Prevention of Money Laundering Act and rules therein
• Not furnishing details of its members who are also intermediaries
• Not furnishing details, despite repeated requests, of National Spot Exchange Limited’s board of directors and key officials
• Wilfully avoiding obligations of a reporting entity by choosing not to be registered or recognised under Forward Contracts (Regulation) Act

Source: FIU order