Securities and Exchange Board of India has tightened norms to detect fraud and market abuse at the stock brokers’ end via mule and proprietary accounts.

The regulator has asked brokers to beef up systems to detect potential mule accounts or suspicious activity. It wants brokers to establish “know your client” surveillance systems and obtain information to verify the identification of clients. Brokers’ trading terminals should be used only by employees and/or authorised persons and only at locations approved by the stock exchanges — and not by clients in any form or manner, it said.

“It will be very difficult for a broker to detect mule accounts, especially for online clients,” said a broking official.

According to him, there are ways to detect unusual activity in an account but these may not necessarily be mule accounts. Also, the new rules place no responsibility on authorised persons, which are quite a few in number. Banks, and not brokers, may be the best entities to detect mule activity, he said. “There are several traders involved in arbitrage who are given terminals and operate from remote locations. They will get impacted because they are not operated by brokers or authorised persons. Liquidity coming from this activity could get impacted if the new rules are applied,” the broker said.

A mule account is a trading account maintained with a stock broker or a dematerialised account or bank account linked with such trading account that is controlled by another person. These accounts could be used for illegal activities such as money laundering and avoiding taxes.

The additional compliance burden may hit hard small and mid-sized brokers. “The new rules are in addition to the existing PMLA requirements and place a lot of onerous liabilities on brokers,” said another broker. “However, the norms will help check the activity of brokers directly involved in the creation of mule accounts.”

In January, SEBI had said it was in the process of gathering data and identifying the modus operandi to crack down on mule accounts. The regulator had found evidence of a large number of IPO applications being filed through fictitious demat accounts. “The IPO applications are filed in a manner that they get rejected. This is done to make the subscription numbers look good. In the interest of investors, we will review both policy and enforcement actions in such areas,” SEBI chairperson Madhabi Puri Buch had said.

Prop rules

The new rules put greater onus on the senior management to maintain surveillance for detecting potential fraud or market abuse by clients, employees or authorised persons. Brokers have to ensure that proprietary accounts are used only for carrying out proprietary trades.

Brokers, on detection of suspicious activity, need to inform the exchanges, within 48 hours of such detection. Brokers have to implement a whistle blower policy that allows a confidential channel for employees and others to raise concerns about suspected fraudulent or unethical practices.