Sebi lets Edelweiss Broking off with a rap on the knuckles for not reporting suspicious transactions

The DA had recommended that the brokerage’s certificate of registration therefore be suspended for three months.

Edelweiss Broking has been asked to exercise more care in reporting suspicious transactions by the market regulator in an order dated June 20.

This was following an investigation into the broker’s professionalism and diligence in checking client’s identities, and in reporting suspicious activities to the Financial Intelligence Unit (FIU).

The Securities and Exchange Board of India (Sebi) had investigated the stealing of shares from dormat accounts by transferring the shares to accounts of bogus entities. The transactions investigated fell between September 14, 2009, and March 8, 2013.

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The investigators claimed that Edelweiss Broking had not been diligent or professional in ascertaining the identity of a certain Yatin Vasantrai Parekh and had failed to report his dealings to FIU even though they were not commensurate with his annual income.

The investigators found this in violation of regulations for brokers.

Following this, a Sebi appointed designated authority (DA) submitted its report in which the DA said that the investigators had failed to establish that the broker had not taken enough care to establish the identity of the client. But, on the second allegation, the DA said that the broker had failed to report suspicious transactions to the FIU.

“The DA has found that by not adhering to the ‘SEBI PML Circulars’, the noticee failed to exercise due care and diligence, professionalism in the conduct of its business,” the order, signed by the Executive Director (ED) of Sebi, stated.

The DA recommended that the brokerage’s certificate of registration therefore be suspended for three months.

The broker was then issued a show-cause notice, asking why the action recommended by the DA should not be taken.

After hearing the broker’s defence, the market regulator has passed the latest order.

In it, the market regulator’s ED agreed with the DA that the broker had exercised due diligence and professionalism to ascertain the identity of the client.

With respect to reporting suspicious transactions, the ED found Edelweiss Broking to have violated Sebi’s prevention of money-laundering (PML) circular.

“It is clear that the circumstances under which Mr. Parekh executed his transactions would have led any person of ordinary prudence to exercise care and diligence to report the transactions as suspicious in accordance with law,” said the order.

It added that by violating this circular, “the noticee has also violated Clause A(2) of the Code of Conduct as specified in Schedule II read with regulation 9(f) of the Broker Regulations which requires the noticee to exercise due skill, care and diligence in the conduct of all its business”.

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That said, considering certain mitigating factors, Sebi’s ED did not agree with the quantum of punishment that the DA had recommended for this lapse. The DA had recommended the suspension of registration for three months.

According to the ED, the mismatch in annual income and turnover of the client was not glaring and the suspicious instances were small in number.