The Securities and Exchange Board of India (Sebi) on Saturday asked some fund trustees to find out the proportion of “high-risk” clients and non-profits in each fund, along with the percentage of investors based in countries figuring on the Financial Action Task Force’s (FATF) grey list or the United Nations Security Council (UNSC) consolidated list.
Trustees must also assess the degree of ‘enhanced due diligence’ carried out by the funds for receiving investments from ‘politically exposed persons’ and other sensitive clients.
FATF is a global body to combat money laundering. The UNSC list names individuals and entities subject to measures imposed by the council.
“Alternative investment funds (AIFs) are growing, attracting money from many countries. Understandably, the regulator thinks AIFs must introduce more checks and balances,” said Venkatesh Prabhu, director and cofounder, MITCON Credentia Trusteeship Services.
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Expanding Sector
“Today, AIFs have to register with Financial Intelligence Unit-India, but there are no reporting guidelines. The regulator might also be looking at reporting requirements with FIU-India soon,” said Prabhu of MITCON Credentia. “Sebi wants to know whether funds are collecting necessary documents from investors and checking their jurisdictions while onboarding them.”AIF is the regulatory term for PE, VC and domestic hedge funds (also known as category III AIFs) that are allowed an extent of leverage.
Unlike funds in advanced markets, where most investors are institutional in character, AIFs in India are largely built with rich and ultra-rich retail investors. In many funds, half the money is from offshore investors. In the past decade or so, AIFs have received total investments of ₹4 lakh crore.
Given the growth in the AIF industry and the increasing emphasis on anti-money laundering (AML) rules, investors’ jurisdiction assumes importance. Entities belonging to countries on the FATF grey list are subject to greater monitoring as these jurisdictions try to plug the gaps in their AML regime.
Risk-profiling Capabilities
The trustees are also to fish out information like the percentage of clients against whom Sebi or any other government agency has passed an order. Besides, funds must share if they have any foreign portfolio investors as clients and whether their know-your-customer (KYC) and AML regimes are subject to audit.
“Sebi is seeking to assess AIFs’ capability to understand and enforce AML programmes,” said Richie Sancheti, founder of law firm Richie Sancheti Associates. “The objective seems to be to understand the risk-based profiling of investors and clients serviced by the intermediary, and to assess the intermediary’s capabilities to operate and react to the AML/CFT (counter-terrorist financing) programme.”
Classifying a client as high-, medium- or low-risk depends on a string of parameters – location (as given in the registered office address or correspondence address), nature of business activity, trading turnover, manner of making payment for transactions or unusual account activity (evident in open-ended funds like category III AIFs), among others.
In October 2018, FATF published a non-binding guidance to clarify and explain how supervisors should apply a risk-based approach in their activities in line with FATF standards.
“The board (Sebi) is in process of conducting risk assessment with respect to money laundering, terror financing and proliferation of financing risks in the securities market,” said the regulator in an email to one of the trustees. “You are requested to provide the list of AIFs. Further, you are requested to ask these AIFs to send the data to the board.”
Rules for AIFs – that can accept money from local as well as offshore investors, subject to a minimum investment of ₹1 crore – have been tightened by Sebi in the past year.
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