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A forensic audit conducted at a brokerage revealed something rather unusual.
A number of demat accounts opened in a remote area were found to be linked to the same bank account. The Know Your Client (KYC) documentation for opening the demat accounts had been forged.
Eighteen months after the Cobrapost sting operation which alleged large-scale money laundering in the banking space, weak Anti-Money Laundering (AML) practices seems a problem that the brokerage industry in particular may be vulnerable to, according to experts tracking the situation. The case above being just one example.
“Given the sheer volume of transactions handled on a day to day basis, majority routing via sub-brokers, setting up of a robust AML framework specifically from the perspective of client/ sub-broker onboarding and transaction monitoring system is the need of the hour. In recent experiences as a part of investigations, we have seen various modus operandi including forging of KYC documents, resulting in the opening of multiple accounts mapped to the same bank account,” said Vikram Babbar, Associate Director - Fraud Investigation & Dispute Services, EY India.
Remote areas are often used for money laundering on account of weaker practices prevalent in such places, say experts. The prevalence of cash transactions in non-metro areas makes these prime locations for money laundering, according to them.
Issues include lapses in identifying risk assessments with regard to the client’s background, their income sources and checking client details against lists of blacklisted entities.
“More often such issues are coupled with rudimentary transaction monitoring systems, silo systems not integrated to each other - leading to layers of manual intervention. In case of latter, there is also a risk of ineffective segregation of client and propriety funds / securities. Chinese walls between the two are imperative to prevent larger AML issues,” added Babbar.
The issues are something that the Securities and Exchange Board of India has also taken cognizance of.
The market regulator is said to have initiated inspections for over 200 members late last year for potential violations or discrepancies related to money laundering regulations following the Cobrapost sting.
The Sebi annual report for the financial year ending in March 2014 said that Sebi had carried out 62 special purpose audits with respect to stock brokers to check their compliance with practices to prevent money laundering and terror funding through the stock market as well as adherence to KYC norms. It added that exchanges and depositories had taken action in 375 cases.
Others suggest that problems extend beyond the broking space.
"Anti-money laundering practices not only in the brokerage industry but also in the broader capital markets space are still evolving compared to the progress having been made in some of the other sub-sectors of the financial services space such as the banking sector," said Rohit Mahajan, Senior Director and Head, Deloitte Forensic in India.
“While the brokerage/ capital markets sector has a lot to learn from other sub sectors within financial services, greater use of technology and adopting data analytics to ensure an effective/ robust continuous monitoring effort to identify suspicious trends and patterns are steps that should be adopted given the current environment and its requirements,” he added.
A senior member of a brokerage association said that the increasing cost of compliance coupled with decreased revenues over the past few years may make this a difficult excercise.
“Brokers are not adequately capitalized and a number of them are not making money. While most of the top ten brokers would have the systems in place to detect such issues, smaller brokers continue to face resource constraints,” said the person.
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