SEBI gets more powers; can seek old case details

The amendments have made it clear that SEBI would have powers to pass orders against any person who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the SEBI regulations

In a major upgrade of powers given to the Securities and Exchange Board of India (SEBI), the government has allowed it to pass orders like search and seizure, attachment of properties, arrest and detention of defaulters and pass disgorgement directions to recover the wrongful gains made in contravention of laws.


At the same time, the government has also allowed SEBI to seek information from other regulators within India and abroad with retrospective effect, paving way for collection of details pertaining to cases pending for over 15 years now.


In another retrospective change, which forms part of the Securities Laws Amendment Ordinance promulgated by the President of India last week, the individuals and companies being probed by SEBI can settle their pending investigations. Such settlements can be undertaken in cases that are currently pending for more than six years.


To tackle the growing menace of Ponzi schemes being floated as Collective Investment Schemes (CIS), the rules have also been amended to classify any money collection of Rs 100 crore or more as CIS operation. SEBI has been given powers to crack down on illegal investment schemes floated by individuals as well, as against companies only as of now.


However, all government-notified schemes would be out of the Collective Investment Scheme framework.


The changes are part of as many as 22 amendments made by the government in three main Acts governing SEBI and its operations—the Securities and Exchange Board of India (SEBI) Act, the Securities Contracts Regulation Act (SCRA) and the Depositories Act—through a 16-page Ordinance.


Among others, SEBI has also been given powers to pass disgorgement orders for amount equivalent to wrongful gains or to losses averted by contravention of regulations.


Besides, the regulator can now enter and search buildings, places, vessels, vehicles and aircraft of defaulters.


Its officers can also break open the lock of any door, box, locker, safe almirah, etc to get information from suspected entities.


At the same time, the defaulters can seek settlement of pending cases with SEBI with retrospective effect from 20 April 2012.


The Ordinance also allows the government to set up as many special courts, as required, to expedite hearing of cases involving contravention of securities laws.


SEBI has also been given direct powers to attach properties and bank accounts of persons and companies failing to comply with directions, involving payment of penalties, refunds to the investors and other dues. The regulator can also order arrest and detention of defaulters in prison.


The powers to seek information from other domestic and foreign regulators have been made effective retrospectively from 6 March 1998.


For seeking information from outside the country, SEBI can enter into an arrangement, agreement or understanding with relevant foreign authorities with the prior approval of the central government.


At the same time, SEBI can now ask for information or records from any person, banks, authorities, boards or corporation, if the regulator is of the opinion that such details could be relevant to any investigation or inquiry being undertaken by it.


With regard to its new search and seizure powers, SEBI can also access the documents maintained in the electronic format.


On settlement, the Ordinance provides that any person against whom any proceedings have been or may be initiated by SEBI under certain sections, may file an application to SEBI proposing for settlement of such proceedings for the alleged defaults.


After taking into account the “nature, gravity and impact of defaults”, SEBI can accept or reject such a settlement on payment of an amount to be decided by the regulator, subject to various terms and conditions.


However, no appeals can be made against SEBI's decision in these matters.


The settlement provision has been made applicable retrospectively with effect from April 20, 2007.


For speedy trial of offences under various SEBI regulations, the Ordinance also provides for setting up of "as many special courts as may be necessary" by the central government.


Such courts would consist of a single judge to be appointed by the central government with concurrence of the chief justice of the high court within whose jurisdiction the judge to be appointed is working.


The judge would need to hold the office of a sessions judge or an additional sessions judge immediately before such appointment.


Also, the person conducting prosecution on behalf of SEBI before such a special court would be deemed to be a public prosecutor within the meaning of the relevant clause of the Code of Criminal Procedure.


Such prosecutors would need to have been in practice as an advocate for at least seven years or should have a minimum experience of seven years in a relevant government job.


Till the time a special court is established, any offences committed under SEBI Acts would be tried by a session court.


If a person fails to pay the penalty imposed by SEBI or fails to comply with any direction for refund of money or any disgorgement orders, the recovery officer appointed by SEBI can proceed to recover such an amount.


The amendments have made it clear that SEBI would have powers to pass orders against any person who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the SEBI regulations.


Maharashtra bans betel leaf, ‘maava’, flavoured tobacco mix

The ban, which would be in force for a year, does not apply to unprocessed betel nut and tobacco, Maharashtra’s minister of state for food and drugs administration, Satej Patil said

The Maharashtra government has extended the ban on sale and manufacture of gutka as well as paan masala to include all types of processed or packaged tobacco.


As a result, local vendors cannot sell paan (betel leaf) with flavoured tobacco, kaath and lime (edible calcium carbonate) and also ‘maava’ or ‘kharra’ (mix of processed tobacco, betel nut or areca nut and lime), ‘khaini’ (flavoured tobacco) or other processed and packaged tobacco products.


The ban, which would be in force for a year, does not apply to unprocessed betel nut and tobacco, Maharashtra’s minister of state for food and drugs administration, Satej Patil said.


“We will start collecting samples from vendors to check them for presence of magnesium carbonate which causes cancer,” the minister said.


On 19th July, the Maharashtra government had extended the ban on gutka by 12 another months and also made provisions to ban other tobacco products as per its new rules.


“The new rules have come into force,” he said.


Sale of betel leaf and made-to-order mix of betel nut and flavoured tobacco, called ‘maava’ in Mumbai, Pune and Western Maharashtra and ‘kharra’ in Nagpur as well as the rest of Vidarbha shot up after gutka and paan masala were banned.


‘Wilful Blind Eyes’ are a threat to banks and financial institutions
Wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. Wilful blind eyes cause the collapse of big institutions confining them to the pages of history for case studies
“Wilful Blind Eyes” are those who wilfully turn blind eyes to any wrongdoing happening, even when they see it happening all around them. It is this conscious, deliberate blindness that nurtures corruption, dishonesty and lack of transparency.
These wilfully blind eyes operate hands-in-glove with the shoddy characters. They deliberately ignore the obvious and allow them to do their job freely. These wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. If these wilfully blind eyes happen to be employees of a bank or a financial institution, they will be subjecting their organisation to embarrassingly huge compliance, legal and reputation risks and also cause its demise. Institutions can also be wilful blind eyes. BCCI instantly comes to mind as everyone in the bank—right from the top to bottom was engaged in fraudulent activities that mostly related to drug money. 
Enron, an American company, is another example that went bust more than 10 years back after it came to light that it had been growing by fudging its numbers and doing some funny accounting. Jeffrey Skilling and Kenneth Lay, the CEO and chairman of Enron, pleaded that they just did not know what was going on in the company and hence could not be held responsible for it. The court asserted that “Skilling and Lay could have known, and had the opportunity to know, just how rotten their company was. Their claim not to know was no excuse under the law. Since they could have known, they were responsible…The law does not care why you remain ignorant, only that you do.”
The rogue trader Nick Lesson’s unchecked risk-taking transactions caused the collapse of Barings Bank. Was it deliberate or was someone behind? Peter Baring himself didn’t ask the question but merely stated: “This was deliberate”.
It was the wilful blind eyes that caused the collapse of these big institutions confining them to the pages of history for case studies purposes. Back home there are chain of cases, prominent among them securities scam perpetrated by the wilfully blind eyes.
These cases demonstrate that wilful blinds can cause irreparable loss to the organisation leading to their collapse but they also highlight that employees are integral to the success of the organisation.
How these wilful blind eyes emerge can be explained as under:
  • A weak-willed employee gets entangled into a difficult financial situation and finds it difficult to extricate himself/herself out of the mess, or an employee looking for a “get rich quick” way to lead lavish lifestyle can be an easy target for recruitment by a money launderer to help in running a money laundering scheme
  • Another  telltale sign of a possible “bad apple” (wilful blind eye) employee is when he becomes sympathetic to a certain political, ethnic or religious  group, and is known  to be  advocate of that political cause, or perhaps is an inside operative or a ‘mole’, taking care of/facilitating their financings at the organisation.
These two (illustrative) high-risk-employee scenarios could become the “wilful blind eyes” at the institution, dragging the institution into unpleasant situations. 
Organisations must have a robust KYE (know your employee) system capable of uncovering the past criminal misdeeds and unethical performance/conduct. New hires must be subjected to detailed background checks, beyond that of educational credentials and work experiences. Good pre-employment screening reduces the risk of employees committing fraud, ensuring that, in the words of Hitesh Patel (of The Risk advisory Croup), “there are no skeletons in the cupboard”. Screening existing employees where a change in responsibilities may give them a greater opportunity to commit fraud or to cover their tracks. Suppliers of temporary staff or contractors need proper screening processes, too.
Second, the institution must have an ongoing and regular review of conduct to detect any possible changes in the employees’ lifestyle, orientation, etc, especially employees who deal directly with the clients or who have decision making authorities over cash or other financial transactions.
Third, the organisation must have an annual employee rotation plan for relationship managers, tellers, key staff and branch personnel. A branch manager should not spend more than two to three years managing a branch; tellers can easily rotate in different distribution points. Transactions, such as deposits, wire transfers and cash withdrawals that follow an employee from one location to the other should immediately raise a red flag. Prevention is better and more urgent than detection.
It should not be so difficult to detect an employee’s possible involvement in a money laundering scheme or in any fraudulent activity by being “a wilful blind eye”. A few of indicative abnormal employee behaviour patterns are:
  • Quick and sudden change of an employee’s lifestyle quality, for example owning a high-priced sports car
  • Reluctance  of the employee to go on a vacation for a long time
  • Employee’s spending habits become noticeably unrealistic in line with his/her known income levels
  • Employee getting too close to a certain client or group of clients
  • Employee refusing or avoiding getting transferred from a certain branch or function
  • Senior management overridden
  • Certain customers or suppliers dealt with exclusively by one employee and guarded jealously
  • Certain apparently mundane tasks retained when they could be delegated
  • Entering into unnecessarily confusing or complex transactions
  • Transactions or structures created with no clear purpose
  • Workaholics
  • Evasive or excessively complicated answers to routine queries
  • Success out of proportion with competence or equally able colleagues
  • Employee becoming too protective and defensive of a client’s relationship details
  • Employee’s sacrificing raises and promotion for the sake of keeping the same position/work location.
These are some of the behaviour patterns better described as “red flags”. If any of the above situations take place at the organisation, action must be initiated to deal with the issue swiftly and steadfastly. The compliance chief must be informed. The suspected ‘mole’ must be placed under intense scrutiny, and if the suspicion gets stronger and is established, he or she has to be taken off his/her duty and investigated. And if enough evidence of malpractices is found, the organisation should consider reporting him/her to the local authorities for further action/prosecution.
Employees know the organisation system very well and are supposed to have been well trained in anti-money laundering compliance and in dealing with money laundering cases and situations. If their performance is not well monitored regularly, they could become a lot more dangerous and riskier than the money launderer himself... For banks and financial institutions, KYE is as important as: Know Your Customer, popularly known as KYC. To Fight Laundering, Know Your Employees Along with Your Customer. Work on a “trust but verify” basis.
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker's Academy in New York.)


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