Off-Market Transfers Below the EDD Trigger at a Depository Participant
Nivaas Depository Services is a SEBI-registered depository participant. Between March and April its branch processed off-market transfers of 2.4 million shares of a small-cap listed company, then valued at ₹18 crore, into a demat account opened six weeks earlier in the name of a company incorporated in January. The account's sole authorised signatory is also the power-of-attorney holder for 14 individual accounts that were the transferors. All 14 accounts share the same mobile number and email address, and the transfers were executed in 11 tranches, each just below the branch's ₹2 lakh value-based enhanced due diligence trigger. The company's declared business is 'investment advisory', its paid-up capital is ₹5 lakh, and it has no website or filed returns. When the branch asked for source of funds, the signatory said the shares were a 'family settlement' and declined to provide documents. The branch completed the transfers because the forms were in order. The principal officer was on leave.
1. List the red flags and explain the customer due diligence and anti-money-laundering obligations the DP failed to meet.
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Red flags. The pattern is more important than any single form. A newly incorporated shell with ₹5 lakh paid-up capital receives ₹18 crore of shares; the same person controls the transferee and all 14 transferors; all accounts share contact details; transfers are split into 11 tranches each kept under the ₹2 lakh enhanced due diligence trigger; the stated 'family settlement' is undocumented; and the client refuses source-of-funds evidence. Structuring to avoid a threshold is itself a suspicious-transaction indicator.
CDD obligations. Under the PMLA and SEBI's KYC norms, the DP must identify the client and the beneficial owner, verify the authorised signatory's authority, understand the nature of the client's business, and conduct enhanced due diligence for high-risk, non-face-to-face or unusually structured clients. A low-paid-up shell receiving high-value off-market shares is high risk. Source of funds and source of wealth must be established, not accepted on assertion. Refusal to provide documents should have stopped the transaction, not merely been noted.
Failure. The branch treated form-compliance as CDD compliance and the principal officer's absence as an excuse. Both are failures of the DP's AML programme.
2. What should the DP do now, and what are the reporting timelines and tipping-off constraints?
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Immediate steps. Freeze the transferee account and the 14 transferor accounts to the extent permitted, stop any further off-market transfer out of them, and preserve all account-opening forms, PAN and address proofs, transfer instructions, bank statements and correspondence. Escalate to the principal officer and the designated director immediately; the principal officer's leave does not suspend the obligation.
Investigation. Re-perform CDD on all 15 accounts, establish the beneficial ownership chain of the transferee company, verify whether the 'family settlement' exists, and examine whether the 11 tranches were deliberately structured. Check whether the same signatory or contact details appear in other accounts at the DP.
Reporting. If suspicion is not dispelled, file a suspicious transaction report with FIU-IND through the principal officer without delay and in any event within the prescribed seven-day window after forming the suspicion. Do not tip off the client or the signatory. Report the matter to the depository and cooperate with any SEBI or depository inquiry. Maintain the STR and the underlying records for at least five years. The DP's statutory reporting duty runs to FIU-IND; the depository is informed through the prescribed channels.
3. The branch manager argues that the DP only executes transfer instructions and that the depository, not the DP, owns the AML outcome. Assess this defence.
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The defence fails. The DP is a SEBI-registered intermediary and a reporting entity under the PMLA. It opens the account, performs KYC, sets the risk category, applies enhanced due diligence, monitors transactions and files the STR. The depository sets the framework and oversees the DP, but it does not take over the DP's customer-level obligations.
Execution is not a defence. A DP cannot shelter behind 'forms in order' when the substance is suspicious. Off-market transfers are a recognised money-laundering and beneficial-ownership risk precisely because the DP is the last control point before the shares move. The branch's own ₹2 lakh trigger was a control the branch designed and then allowed to be defeated by structuring; that is an aggravated, not mitigating, fact.
Accountability. The principal officer and the designated director are responsible for the AML programme, and the branch manager for front-line escalation. Disciplinary action, retraining and a branch-level audit should follow. The DP should also review whether its threshold-based EDD trigger is appropriate, since value thresholds invite splitting; cumulative-value and behavioural triggers are stronger controls.