This Order is passed in the matter of Appeal No. 19 of 2019 filed under section 33 of the Securities and exchange Commission of Pakistan Commission Act, 1997 (SECP Act) against the order dated 08/04/19 (Impugned Order) passed by Commissioner , Securities Market Division (Respondent).
2. The brief facts of the case are that Adam Securities Limited (the Appellant) is a Trading Right Entitlement Certificate (TREC) holder of the Pakistan Stock Exchange Limited (PSX) and licensed as a securities broker under the Securities Act, 2015 (Securities Act). The Joint inspection Team of PSX, Central Depository Company and National Clearing Company of Pakistan Limited (HT) conducted an inspection of the Appellant (Inspection) to assess its compliance with the regulatory requirements contained in the Securities and Exchange Commission of Pakistan (Anti-Money Laundering and Countering Financing of Terrorism) Regulations, 2018 (AML Regulations).
The Inspection , inter alia , revealed the following: i. The Appellant had failed to mention the dates on which it performed customer due diligence (CDD) of its seventeen (17) clients, ii. The Anti-Money Laundering and Coun tering Financing of Terrorism (AML/CFT) policy of the Appellant had not been approved by its board of directors. iii.The Appellant had failed to develop an ongoing mechanism to ensure that the transactions are consistent with its knowledge of the customers. iv. The Appellant had failed to chalk out and implement a training program for its employees to effectively implement regulatory requirements relating to anti-money laundering and terrorism financing. v. The Appellant had extended a loan of Rs. 50 million to another brokerage house in violation of Securities Act.
3. The Appellant prima facie acted in violation of the AML Regulations and the Securities Act. The Commission took cognizance of the aforementioned facts and served a show cause notice dated 07/02/19 (SCN) to the Appellant.
The Appellant submitted its reply through email dated 19/02/19. Hearing in the matter was held on 26/02/19 and Mr. Noman Abdul Majeed, Chief Execu tive Officer and Mr. Muhammad Rizwa n Haroon, Company Secretary appeared on behalf of the Appellant and made their submissions.
4. The Respondent dissatisfied with the response of the Appellant held that while the AML Regulations were issued in 2018, the requirements contained therein are not new, therefore, contraventions of AML Regulations had been established. The Respondent in terms of powers conferred under section 40A of the Securities and Exchange Commission of Pakistan Act, 1997 (Act) imposed a penalty of Rs. 250,000/-on the Appellant under section 40A of the Act. The Appellant was further advised to examine its Anti Money Laundering/Countering Financing of Terrorism (AML/CFT) policy and procedures and the accounts of its clients to ensure that the requirements contained in the AML Regulations are met in letter and spirit and in this regard submit a report to the Commission within sixty days of the date of the Order . The Appellant was also warned by the Respondent that any non-compliance of the AML Regulations noticed during future inspections/investigations would attract significantly higher penalties.
5. The Appellant preferred the instant appeal on the following grounds: a) The Appellant is a public unlisted company and has been in the business of brokerage and securities since 2001. The AML Regulations were new at the time of the proceedings when they came into force on 13/06/18. The claim made by the Respondent that AML Regulations were similar to the requirements introduced in 2012 when then Karachi Stook Exchange (presently PSX) through regulation 4.18 of the Rule Book (PSX Regulation), made it 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 PSX (PSX's KYC and CDD Guidelines) does not hold merit. The subsequent report after the Inspection (Report) does not make any mention or give reference of the PSX Regulation and PSX's KYC and CDD Guidelines. Furthermore, as the AML Regulations were new, it took time for their full implementation and multiple awareness sessions were being conducted not only by PSX but also by the Commission at the time of the proceedings. b) The Appellant carried out an exercise to obtain information regarding the source of income from clients and did everything in their control to obtain such information which is a part of the record. As per the Frequently Asked Questions (FAQs) by the Commission on AML/CFT Regulations, in case of low risk customers, no specific evidence is required for source of income. The Respondent's claim that the dates on all the KYC forms were missing is completely incorrect. Firstly , there were only a few forms on which the date was not documented while dates on all other KYC forms were duly documented. Secondly , it is nowhere explicitly mentioned in the Regulations that the Appellant is required to input date on KYC forms. The Regulations only require risk assessment of the clients to be updated on a periodic basis. Thirdly , the Appellant later ensured