FIU reviews KYC, suspicious transactions reporting by FIIs

Anti-money laundering body to meet Sebi, custodians

Money laundering watchdog Financial Intelligence Unit (FIU) is reviewing the reporting processes and compliance norms followed by foreign institutional investors (FIIs) and custodians who service these investors.

FIU, which falls under the finance ministry, is the national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

As part of the process, FIU has called a meeting of the Securities and Exchange Board of India (Sebi) officials and top custodians to review the investment processes, know-your-customer (KYC) procedures and types of suspicious cases noticed by the custodians.

“This is the first such meeting called by FIU in five years. The level of compliance, problem areas and any new measures required are likely to be discussed in the meeting,” said a senior official familiar with the development.

FIU also wants a report from each of the custodians about their status of compliance on the Prevention of Money Laundering Act (PMLA) provisions, in terms of KYC and suspicious transactions. The meeting, to be headed by the director of FIU, assumes significance following a recent ‘White Paper’ on black money. This had identified participatory note (P-note) investments through the FII route as one of the problem areas.

The Paper, from the central government in June, said P-notes are one way through which illicit money transferred outside India comes back to the country through ‘round tripping’.

BLACK OR WHITE?

FIU reviews KYC norms and compliance by custodians

Watchdog to meet Sebi, custodians on Monday

Custodians to update FIU on level of compliance

New Sebi guidelines for custodians to be discussed

Move comes after black money report points to round-tripping of illicit money

P-notes or overseas derivative instruments (ODIs) issued by FIIs are popular among foreign investors, since they allow the latter to earn a return on investments in the Indian market without undergoing the significant cost and time implications of directly investing.

“These instruments are traded overseas, outside the direct purview of Sebi surveillance, thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these instruments. Concerns have been raised that some of the money coming into the market via P-notes could be the unaccounted wealth camouflaged under the guise of FII investment,” the White Paper said.

Soon after this report, Sebi had tightened the reporting norms for P-note investments. It asked FIIs to report monthly details of transactions done through P-notes within 10 days. Earlier, FIIs had a window of six months to report these transactions.

“FIIs issuing ODIs/PNs shall submit details of ODI/PN transaction report (Annexure A, B and C) along with the monthly summary report by the 10th of every month for the previous month’s ODI transactions.” Sebi had said. The first such report, for October, was due by November 10.

These moves and its impact will be discussed in the meeting, people familiar with the matter said.