Weapons of Mass Destruction, The Act, and Its Compliance for Capital Market – A Primer.

Dr. John Mathews , CAMS

John has spent over 36 years in financial services, largely with HDFC Ltd. and HDFC AMC where he served in various capacities. He is ex EVP & Head – Corporate Client Services at HDFC AMC and its first Principal Officer – AML. He has served on committees with SEBI, AMFI and FIU-IND. He holds a Doctorate from the University of Hertfordshire in England, specializing in AML and is ACAMS certified. He is an Advisor with TSS Consultancy Pvt. Ltd assisting clients in policy making, risk assessment, training etc. He also consults NSDL on AML, Risk and other areas.
For more: linkedin.com/in/vjohnmathews

Background:

Adoption of the United Nations Security Council Resolution 1540 (2004) was perhaps a watershed moment in the global action against weapons of mass destruction and its delivery systems (collectively referred to as “WMD”). The resolution obliges states to refrain from providing any form of support to non-state actors that attempt to acquire nuclear, chemical or biological weapons and their means of delivery. The 1540 committee was established as a subsidiary body of the Security Council to report on the implementation of the resolution, with the United Nations Office for Disarmament Affairs (UNODA) providing support to the 1540 committee. These measures have ensured that increased global vigilance and cooperation can accelerate efforts for a safer world.

What are Weapons of Mass Destruction (WMD)?

These are weapons with the capacity to inflict death and destruction on a massive scale. Modern weapons of mass destruction are nuclear, biological, or chemical weapons.

The Indian Context for WMD and its legislation/regulation

The Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (hereafter the “Act”)
The Act prohibits unlawful activities (i.e., manufacturing, transportation, or transfers) related to WMD. The Act provides for integrated legal measures to exercise controls over the export of WMD, its technology, or transfer to non-state actors or terrorists.
Amendments to the Act
The amendments to the Act were introduced in 2022 under a new supplemental Section i.e., 12A. It bars persons from financing any prohibited activity related to WMD. To prevent persons from financing such activities or any other allied activities, the Centre may freeze, seize or attach their funds, financial assets, or economic resources (whether owned, held, or controlled directly or indirectly). The UNSC and the FATF recommendations have also mandated against such financing of WMD.

The List of Banned Entities under Section 12A
The list of banned entities is prepared by the Ministry of External Affairs, and hosted by the Chief Nodal Officer (CNO,currently Director, FIU-IND) on the website of FIU-IND. Currently, the list of designated entities and individuals (referred hereafter as “persons”) is the same as the UNSCR 1718 (2006), its additional resolutions and certain individuals / entities under the UNSC consolidated list. The links are provided below.

Sr	Particulars	UNSC Resolution
1	Democratic Peoples Republic of Korea (North Korea)	https://www.un.org/securitycouncil/sanctions/1718
2	UNSC Consolidated List	https://www.un.org/securitycouncil/content/un-sc-consolidated-list

Reporting Authorities – Chief Nodal Officer and State Level Officers
The government has appointed a CNO for the purpose of this section. The CNO shall maintain the designated list (“the WMD list”) on the portal of FIU-IND and keep it updated. All Indian states shall also appoint a designated SNO. The MCA shall also appoint a designated Nodal Officer. These officers are also Designated Officers under Section 51A of the UAPA.
Implementation of Section 12A by Capital Market Reporting Entities (RE’s)
RE(s) shall verify if the particulars of the sanctioned entities/individuals linked to the financial transaction match with those in the WMD list. In case of a match, the REs shall not transact with them and immediately inform the transaction details with full particulars of the funds, financial assets or economic resources involved to the Chief Nodal Officer (CNO) by email, fax and by post, without delay. These checks shall be performed at the time of a new account opening and on a periodic basis for existing clients. If a name match is found, the obligation for a RE is to promptly inform the CNO and SNO respectively. Where the match is confirmed, RE’s may also freeze the account, inform the CNO/SNO and file a Suspicious Transactions Report with FIU-IND.The scope of Section 12A was also extended to cover registrars of immovable properties, real-estate agents, dealers of precious metals/stones, registrar of societies/firms/non-profit organizations and Designated Non-Financial Businesses and Professions. The Ministry of Corporate Affairs (MCA) has issued a similar order to the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India to sensitise their members about provisions of Section 12A and ensure prompt compliance.
Ensuring Compliance using Screening Solutions
The recommended technological solution to be fully compliant with regulations is to perform sanctions screening using suitable and reliable tools like Screenzaa by TrackWizz. Screening allows a RE to continually check if they are exposed to any specific risk of money laundering by sanctioned persons or politically exposed persons.
SEBI Circular on Section 12A of WMD Act
SEBI’s Procedure for implementation of Section 12A and Directions to Stock Exchanges and registered intermediaries – Link to Circular and guidelines as below:
https://www.sebi.gov.in/legal/circulars/apr-2023/procedure-for-implementation-of-section-12a-of-the-weapons-of-mass-destruction-and-their-delivery-systems-prohibition-of-unlawful-activities-act-2005-directions-to-stock-exchanges-and-registered-_70545.html