Brokers required to have CFT policy well before promulgation of law: SECP bench

The Appellant Bench of Securities and Exchange Commission of Pakistan (SECP) has conveyed to stock market brokers that even prior to promulgation of Money Laundering and Countering Financing of Terrorism Regulations, 2018, brokers were required to have AML/CFT policy, customer identification and risk assessment of their customers. This has been specified in an order issued by the SECP Appellant Bench here on Friday against a Trading Rights Entitlement Certificate (TREC) holder of the Pakistan Stock Exchange Limited (PSX) licensed as a securities broker.

The SECP Bench has no doubt to hold that the Regulations 2018 had not introduced new regulatory requirements rather prior regulatory requirements had been streamlined. The Bench has observed that even prior to the promulgation of the Regulations, the Appellant (broker) was required to have AML/CFT Policy, customer identification, risk assessment of customer, CDD, on-going monitoring, beneficial ownership, evidence of sources of fund and internal audit department under the previous regulatory legal framework; however, the broker failed to comply with the applicable requirements.

The Bench has examined the appeal and found that the Appellant broker had admitted that requirement of client risk assessment, internal audit function and ongoing mechanism for monitoring CDD were met after enactment of the Regulations and SECP's AML guidelines 2018.

The Bench has also minutely scrutinized ground "b" of the appeal wherein Appellant has stated that Respondent (Commissioner SECP) had failed to explain how prior regulatory framework and rules/regulations were violated.

The Bench is of the view that Appellant's assertions are insignificant to distort the findings of the Impugned Order because the requirements contained under the Regulations were not new, rather these were introduced in 2012 by the Karachi Stock Exchange (presently PSX), with the approval of the Commission, through regulation 4.18 of the Rule Book ( current Regulation 4.17). These requirements were made mandatory for the securities brokers to formulate and implement an effective KYC and CDD policy in accordance with the KYC and CDD guidelines issued by the Karachi Stock Exchange in 2012.

The Bench has compared the requirements of the regulatory framework of 2012 with the Regulations and SECP's AML Guidelines 2018, and observes that they do not reflect any material difference in terms of requirements, for instance, customer identification, risk assessment of customer, CDD and ongoing monitoring. Furthermore, the requirement of an internal audit department was part of the licensing requirements of the Brokers Regulations and under Regulation 16 of the Brokers Regulations, it was the duty of Appellant to have an independent audit function.

The SECP Bench has no doubt to hold that the said Regulations 2018 had not introduced new regulatory requirements; rather, prior regulatory requirements had been streamlined. The Bench has observed that even prior to the promulgation of the Regulations, the Appellant was required to have AML/CFT Policy, customer identification, risk assessment of customer, CDD, ongoing monitoring, beneficial ownership evidence of sources of fund and internal audit department under the previous regulatory legal framework; however, the Appellant had failed to comply with the applicable requirements.

The Bench is of the view that violations under the Regulations are of serious nature; however, alleged non-compliance of Regulation 14 (currency transaction report) was the gravest violation. Nevertheless, CTR violation has not been established against the Appellant; therefore, the Bench is inclined to take a lenient view. "In the circumstances, while maintaining the verdict of the Impugned Order, to the extent of other violations, we hereby reduce the penalty of fine from Rs 850,000 to Rs 250,000 and direct the Appellant company to comply with the regulatory and statutory requirements in letter and spirit, to avoid strict penal action in future," the Bench added.

Copyright Business Recorder, 2019