KYC, money-laundering norms seen flouted.
The Rs 300-crore fraud at Citibank’s Gurgaon branch is taking on the hues of a larger systemic issue. The Securities & Exchange Board of India (Sebi) and the Financial Intelligence Unit (FIU) are probing the dealings of leading stock brokers to ascertain whether there was any violation of the know-your-customer or anti-money laundering norms.
Sebi officials today met employees of two brokerage firms, Religare and Bonanza, through which Citibank Relationship Manager Shivraj Puri executed his stock market transactions.
The regulators want to determine whether there was a systemic failure and whether the brokerage houses failed to follow proper KYC norms. The more immediate issue is whether these brokerages filed regular suspicious transaction reports (STRs), which are mandatory under the Prevention of Money Laundering Act, 2002.
The volumes generated in the market while trading could have been thousands of crores, market participants said.
| SMOKING GUN |
| * Brokers must obtain all details of client during KYC procedure |
| * Suspicious transactions above Rs 10 lakh must be reported |
| * Sebi officials say there were enough grounds to file STRs |
| * Religare, Bonanza declined to divulge details of KYC & STRs |
The FIU, which is the nodal agency to monitor suspected money-laundering cases, has raised concerns that instances of money laundering were on the rise in the equity markets, and yet brokers were not filing STRs. Following this, the National Stock Exchange started imposing fines on brokers, who failed to file regular STRs.
The Prevention of Money Laundering Act requires all financial institutions, banks and intermediaries like merchant bankers, foreign institutional investors and stock brokers to submit reports on suspicious transactions above Rs 10 lakh in Indian or foreign currencies.
STRs are filed in cases of suspicious identity and background of clients, multiple accounts, nature and value of transactions and any other dubious activity by clients, within seven working days of noticing such transactions. Brokers are supposed to obtain all background details of a client during their KYC procedure, without which trading accounts cannot be opened.
According to stock exchange and Sebi officials, there were enough grounds for brokers to file STRs on all transactions carried out by Puri and accounts related to him if a proper KYC was conducted.
“The first thing brokers would have known while opening Puri’s trading account was that he was a Citibank employee. If they knew that, how did they allow him to open trading accounts in his own name, apart from that of his father and wife, and still let him trade as a portfolio manager?” asked a Sebi official.
“A little due diligence would have told them that all the accounts were linked and the question they should have asked is why a portfolio manager was trading his clients’ money through his wife and father’s accounts. Clearly, somewhere, KYC and money-laundering norms have been compromised,” the official added.
Hitesh Jain, a leading lawyer dealing with money-laundering cases, said, “If the reports were filed, then the case could have been detected earlier. This angle needs to be probed.”
When contacted, Religare and Bonanza declined to divulge any details on the KYC they had conducted or whether they had filed any STRs on Puri’s transactions.
In an emailed response, Religare said: “We have followed all guidelines and all norms as per compliance have been met. The account opening and transactions in the account were in the normal course of business, like it is done for any other account. In the course of the transactions with Religare, which were only in derivatives, the settlement of his accounts was also being done in the normal course. As on October 15, 2010, there is balance of 30 paise only in his account. There has been no trading transaction in his account since October 1, 2010.”
Shiv Kumar Goel, director, Bonanza, said: “We are cooperating with the investigations and will provide all the required information to the authorities.”
Puri, who handled high net-worth individuals, allegedly diverted around Rs 300 crore from more than 20 clients. According to police reports, Puri duped the HNI clients into investing in dubious schemes. But their money was diverted to accounts opened in the name of his wife and two others.
Puri used a forged Sebi notification to convince clients the transactions were bona fide.
Investigations into the scam also revealed that a majority of the money was put into the derivatives market and invested in Nifty index options.
