KYC and PMLA - Importance & Implications Research Analyst must understand

SEBI vide its amendment dated 16th Dec 24 in SEBI RA Regulations, 2014 and further vide its circular SEBI/HO/MIRSD/ MIRSD-PoD-1/P/CIR/2025/004 dated 8th Jan 25 had made it mandatory for research analyst to do KYC of fee paying clients. The amendment dated 16th Dec 24 to SEBI RA regulations, 2014 has included KYC as mandatory books of records under regulation 25 (1).

What is the logic behind making KYC important ? I divide answer to this question in two parts

PART 1 : The logic, spirit and intention of law behind KYC

The main reason behind KYC is to establish the identity of person or beneficial owner behind a transaction - whether financial or otherwise. The KYC originated as a global compliance standard to prevent money laundering, terrorist financing, identity theft, and fraudulent financial activities.

KYC ensures

1. Establish correct Identity of clients/ beneficial owners

2. address / location verification

3. Financial profile understanding

4. creation of audit trail

5. Monitoring of transactions and risk assessment

PART 2: The origin and history in India & its compulsory nature

In 2002, The Prevention of Money Laundering Act was enacted which provided the foundation of combating Money laundering, Benami/anonymous transactions, Terrorist Financing, Hawala activities & Financial frauds.

In 2005, The PMLA (maintenance of records) rules were notified and critical procedures like Client Due Diligence (CDD) were established. The client due diligence is a cornerstone of PMLA.

After 2005, serious journey towards establishing KYC procedure started and now not only KYC procedures have matured but also has been made mandatory.

Why It is is Mandatory for SEBI intermediaries to do KYC?

Its roots are referenced back to Rule 9 of PMLA (MoR) rules, 2005. Rule 9 of PMLA rules talks about Client Due Diligence procedure in detail.

Rule 9 (1) clearly creates an obligation on reporting entities to identify its clients, verify their identity using reliable & independent sources including understanding the nature of business, beneficial ownership & control.

Under section 2(wa) of PMLA act, 2002 - Reporting entities include Intermediaries. Intermediaries are defined under section 2(n) as entities/individuals registered under SEBI act, 1992. THIS CREATES A CONNECTION BETWEEN SEBI INTERMEDIARIES AND KYC AS PER PMLA.

Hence doing KYC is mandatory for SEBI intermediaries which few specific requirement applicable to different categories of Intermediaries.

What is the Right process of doing KYC by Research Analyst ?

Research analyst are required to Collect, store, upload and check the KYC records of fee paying client. Hence, RA is only required to check the KYC records inside the KRA system and take screenshot of KYC for record maintenance under regulation 25(1) of SEBI RA regulations, 2014.

A lot of Research analyst do KYC by fetching. Fetching the KYC records gives XML file which is not the right record. Doing KYC via fetching is not right procedure for research analyst. Guidelines dated 8th Jan 25 do not specify any fetching requirements.

What are the consequences of not doing KYC ?

By now you appreciate the importance of KYC and its connection with PMLA Act. If research analyst do not maintain the record of KYC of their clients, it is gross violation of

not only SEBI RA regulations and SEBI (intermediaries) regulations, 2008 but also it is a serious violation of PMLA Act.

SEBI can take stringent action against intermediary if they fail to do KYC. If the client are found to be involved in activities covered under PMLA as illegal / money laundering activities, the PMLA authorities can also start proceedings against intermediaries who were supposed to perform duties of maintaining the KYC records.

To conclude KYC is not just a duty to be performed by research analyst but it is also a safeguard for research analyst against any potential action which might be taken by PMLA authorities if clients are found to be involved in money laundering activities. KYC is essential part of Client Due Diligence (CDD) and must be taken in all seriousness.

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