SEBI directs Edelweiss Broking to be more cautious in reporting suspicious transactions

The directive comes after an investigation into the broker's adherence to professional standards and diligence in verifying client identities, as well as reporting any suspicious activities to the Financial Intelligence Unit (FIU).

The stock market watchdog conducted an investigation into the unauthorised transfer of shares from dormant accounts to accounts held by fictitious entities.

The transactions under scrutiny occurred between September 14, 2009, and March 8, 2013.

According to the investigators, Edelweiss Broking was accused of not exercising diligence and professionalism in verifying the identity of an individual named Yatin Vasantrai Parekh.

Further, the investigators found that the broker had neglected to report Parekh's transactions to the Financial Intelligence Unit (FIU), despite the fact that they were inconsistent with his declared annual income.

In response to the investigation, a designated authority (DA) appointed by SEBI submitted a report stating that the investigators were unable to provide sufficient evidence to support the claim that the broker had neglected to verify the client's identity properly.

However, the DA acknowledged that the broker had indeed failed to report suspicious transactions to the Financial Intelligence Unit (FIU), supporting the second allegation made against it.

This failure to report was considered a violation of regulations for brokers.

“The DA has found that by not adhering to the ‘SEBI PML Circulars’, the noticee failed to exercise due care and diligence, professionalism in the conduct of its business,” the order, signed by the Executive Director (ED) of Sebi, stated.

The designated authority (DA) recommended a three-month suspension of the brokerage's certificate of registration as a consequence.

Subsequently, the broker received a show-cause notice, requiring them to present reasons why the recommended action should not be taken.

After considering the broker's defence, the market regulator issued a new order. In this order, the market regulator's Enforcement Director (ED) agreed with the DA's assessment that the broker had exercised adequate diligence and professionalism in verifying the client's identity.

However, regarding the reporting of suspicious transactions, the ED determined that Edelweiss Broking had violated Sebi's prevention of money laundering (PML) circular.

“It is clear that the circumstances under which Mr. Parekh executed his transactions would have led any person of ordinary prudence to exercise care and diligence to report the transactions as suspicious in accordance with law,” said the order, reported Moneycontrol.

It added that by violating this circular, “the noticee has also violated Clause A(2) of the Code of Conduct as specified in Schedule II read with regulation 9(f) of the Broker Regulations which requires the noticee to exercise due skill, care and diligence in the conduct of all its business”.

However, taking into account certain mitigating factors, SEBI’s Enforcement Director (ED) disagreed with the severity of the punishment proposed by the designated authority (DA) for this particular lapse. The DA had recommended a three-month suspension of the brokerage's registration.

According to the ED, the disparity between the client's annual income and turnover was not glaring, and the number of suspicious instances was relatively small.