Onboarding a Company Whose Papers Do Not Fit
Sunrise Traders Pvt Ltd wants to start an advisory relationship with a Rs. 75 lakh portfolio and wants advice 'from today'. The file contains the company's PAN, a board resolution, and a power of attorney in favour of one director that expires in three weeks. The address proof is a rent agreement in the name of a group company, not Sunrise. One director has declined to provide his PAN, citing privacy. The entity's beneficial owner above 25% is a trust registered in Mauritius. The fee debit mandate is a bank account in the personal name of one of the directors. A junior compliance staffer categorised the client as 'low risk' yesterday and the relationship manager is pressing to begin.
1. Identify each defect in the file and state what must be obtained or corrected before onboarding can be treated as complete.
Read the worked answer
| Item | Defect | Fix before onboarding |
|---|---|---|
| Address proof | Rent agreement in a group company's name, not the client's | Proof in the entity's own name; failing that, the prescribed alternate documentary set plus a documented rationale |
| Power of attorney | Expires in 3 weeks | Authority must cover the expected life of the relationship, or be renewed now; a near-expiry PoA cannot support ongoing instructions and any advice given after expiry is unauthorised |
| Director's PAN | Withheld | The identification set for the entity includes its directors/authorised persons; refusal is not a privacy right that overrides KYC. If refused, escalate to the principal officer/compliance and do not proceed |
| Constitution documents | MOA/AOA and list of directors/beneficial owners not evidenced in the file | Obtain certified copies; verify the signatory's authority |
| Beneficial owner | Foreign trust above 25% - not identified or documented | Identify the UBO and the chain of control, obtain the trust deed/registration and identification of trustees/settlors; foreign UBOs attract enhanced scrutiny |
| Bank mandate | Personal account of a director | The fee-debit account must be the client entity's own account; third-party/personal accounts are not acceptable |
| Risk category | Set to low with a foreign trust UBO and an incomplete file | Re-categorise on documented parameters; a junior's unilateral downgrade needs principal-officer review and sign-off |
The relationship manager's deadline is not a KYC input. The correct decision is a documented 'onboarding pending' with a list of outstanding items, and a written communication to the client explaining what is needed.
2. How should the entity be risk-categorised, and what does that imply for periodic re-KYC and monitoring?
Read the worked answer
Not 'low'. This profile points to at least medium, and arguably high, risk.
Drivers pushing risk upward:
- A non-individual structure with a foreign trust as beneficial owner - opacity, cross-border element.
- Incomplete identification of directors and UBO.
- Third-party payment arrangement and a short-dated PoA - both are classic indicators in money-laundering typologies.
- A large initial portfolio (Rs. 75 lakh) with pressure to start immediately.
What the category drives:
- Periodic re-KYC frequency - under SEBI's KYC framework, high-risk clients are re-KYC'd on the shortest cycle (around every 2 years), medium-risk on a longer cycle (around 8 years) and low-risk on the longest (around 10 years). The exact cycle should be taken from the current KYC master circular in force rather than from memory.
- Enhanced due diligence - source of funds/wealth for the Rs. 75 lakh, verification of the trust's registration and trustees, senior-management approval of the relationship.
- Ongoing monitoring - transaction pattern review (unusual inflows from unrelated parties, rapid in-and-out, fee paid from a third account), and a trigger-based refresh whenever the PoA, directors or UBO change.
- Record-keeping - the categorisation rationale, the EDD documents and the approval must be retained for the prescribed period (five years for advisory records) so that the decision can be defended later.
A 'low risk' tag here would be indefensible if the account were later misused, and it is the compliance officer, not the relationship manager, who owns that call.
3. Can the firm give Sunrise its first piece of advice today, on an interim basis, while the paperwork is completed?
Read the worked answer
No. Advice does not start before onboarding, and 'interim' advice is still advice.
Reasons:
- No valid client relationship. The advisory agreement, fee terms, risk profile and conflict disclosures must be in place. The PoA that authorises the signatory expires in three weeks and does not cover an ongoing mandate; advice given on the strength of it would be advice given to a person whose authority is defective.
- KYC incomplete - unidentified director and UBO, unverified address, third-party payment account. Proceeding would mean the firm knowingly began a relationship on an incomplete file, which is the single most damaging fact in any later enforcement or audit.
- Suitability cannot be assessed. For a corporate client, the firm needs the investment objective, the authorising resolution's scope, the risk appetite and the time horizon. None of these is in the file.
- The 'today' pressure is itself a red flag. Unusual urgency combined with a foreign trust UBO, a third-party account and a near-expiry PoA is exactly the pattern that enhanced due diligence exists to catch.
What to do instead: give the client a written list of outstanding items, a timeline, and a clear statement that advice will commence on completion and approval. If the client genuinely needs market exposure in the meantime, the honest answer is that the firm cannot act for it yet - not to route the money elsewhere under pressure. Escalate the file to the principal officer, and separately review why a junior officer was able to assign a risk grade without review.