Market regulator Securities and Exchange Board of India (Sebi) has stepped up its vigil against potential misuse of stock markets for illicit purposes as India gears up for general elections. During the annual inspections of brokers conducted by Sebi for FY23-24, the market regulator has focused on the politically exposed persons (PEPs) and mule accounts, said two people with direct knowledge of the matter.
The regulator has also dwelt in detail to see if the brokers have followed all the rules applicable for flagging and monitoring of PEP accounts. Also, Sebi checked the risk management practices adopted by the brokers to combat the issue of mule accounts, people cited above added. The development is a part of preventive measures being taken by regulators to enhance scrutiny of money flow ahead of major national events such as the General Elections.
A PEP is someone who holds a prominent public post, such as members of Parliament, leaders of big political parties, senior bureaucrats and heads of government agencies. People in direct contact with such individuals also fall under the category. Mule accounts are dummy accounts created for purposes of money laundering and tax evasion.
An email sent to Sebi seeking a response remained unanswered.
“In several cases, Sebi has issued observations to brokers for non-adherence to the rules. For smaller digressions, Sebi has issued warning letters to the brokers.” the source said. “However, bigger lapses will go through an adjudication process where Sebi may issue regulatory orders”.
Mule accounts have been at the heart of some of the regulatory action initiated by Sebi recently as the regulator observed that some brokers/bankers were using such accounts to inflate public offering subscription numbers.
During these inspections, Sebi has also checked the compliance of brokers to rules relating to data sharing with regulatory agencies. For instance, any sudden surge in the activity of a PEP should be reported to the Financial Intelligence Unit (FIU) under the category of suspicious transactions. Similarly, any suspected mule accounts should be notified to FIU and the tax department. These inputs need to be passed on to FIU through filing of a form named Suspicious Transaction Report (STR).
“In the case of certain new age brokers, it has been observed there were lapses in flagging PEP accounts. Also this year, Sebi even inspected books of some of the institutional investors including Alternative Investment funds (AIFs) and global custodians to ascertain if their risk management practices were in line with the rules,” said the second person cited above.
As per Sebi rules, it is mandatory for both the brokerages and mutual funds to capture the data of PEPs and also collect additional KYC information from them. PEPs are considered high-risk customers by all types of financial institutions including banks and non banking finance companies (NBFCs). It is a global practice to track such clients since there is a greater potential for malpractice as they possess a higher level of information than others.
Every year, Sebi randomly picks certain market intermediaries to inspect the books. Additionally, the stock exchanges conduct their own set of inspections on market intermediaries to ensure adherence to the rules.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
