Regulatory framework of 2012, SECP's AML guidelines of 2018: Requirements are the same, SECP bench tells brokers

An Appellant Bench of the Securities and Exchange Commission of Pakistan (SECP) has conveyed to the stock market brokers that requirements of the regulatory framework/guidelines of 2012 issued by Karachi Stock Exchange (KSE) and SECP's Anti-Money Laundering guidelines of 2018 are almost the same.

In this regard, the two-member bench of the SECP has dismissed an appeal filed by a company, which holds Trading Rights Entitlement Certificate (TREC) of Pakistan Stock Exchange Limited (PSX) and is licensed as a securities broker under the Securities Act, 2015.

The two-member SECP Appellant Bench observed that regulatory requirements relating to KYC/CDD and Anti-Money laundering have been implemented since 2012; therefore, the Regulations cannot be termed as a new set of requirements. The Bench is of the view that 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 SECP Appellant 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. Therefore, the Bench has no doubt to hold that the Regulations had not introduced any significantly 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 (securities broker) was required to have customer identification, CDD and beneficial ownership under the previous regulatory legal framework but the Appellant had failed to comply with the applicable requirements.

The brief facts of the case are that the Appellant is a TREC holder of the PSX and licensed as a securities broker under the Securities Act, 2015. The joint inspection team of PSX, Central Depository Company and National Clearing Company of Pakistan Limited conducted an inspection (inspection) of the Appellant to assess its compliance with the regulatory requirements contained in Securities and Exchange Commission of Pakistan (Anti-Money Laundering and Countering Financing of Terrorism) Regulations, 2018 (Regulations). The inspection, inter alia, revealed the following: i) the Appellant had not adequately established beneficial ownership of its corporate clients and; ii) the Appellant had failed to perform CDD of eleven of its clients (out of a sample of 27) by not obtaining basic information including source of funds prior to opening of the account.

The broker has challenged the impugned order inter alia on the grounds that trading account of the corporate client was opened in 20I6; however, financial statements were not submitted, therefore, trading through said account was never allowed. The Appellant further submitted that after promulgation of the regulations, the corporate client was asked to provide information about the beneficial ownership but the requisite information was not provided within the stipulated time; therefore, the trading account was closed. The Appellant further stated that after the promulgation of the Regulations, KYC/CDD exercise was initiated for all clients (new & old). The Appellant contended that old clients and inactive accounts were not reachable; therefore, due to deadline for submitting the information, all untraceable clients were classified as high risk; however, now KYC/CDD of all clients is almost complete. The Bench has heard the parties and perused the record. The broker's representative reiterated the grounds of appeal and contended that inspection/ review was carried out before the issuance of AML guidelines 2018, therefore, sufficient time was not provided to understand and comply with the requirements of the regulations. Whereas the SECP official rebutted such grounds and argued that violated requirements of the regulations were also part of the 2012 regulatory framework; therefore, the respondent cannot take the plea that requirements of the regulations were significantly different and sufficient time was not provided for compliance.