Tipping off
Also written Tipping off the client
Telling a client that a suspicious transaction report about them has been or will be filed — illegal, and the reason the broker reports to the Financial Intelligence Unit in silence.
In plain language
A suspicious transaction report works only if the person it describes does not know it exists.
The moment a client is told, the investigation is over before it starts: accounts are emptied, patterns change, and the trail the report was meant to preserve disappears. So the law makes the warning itself an offence. The workbook is blunt — brokers are not supposed to inform the client about this reporting as it will lead to tipping-off information to client which is illegal and not allowed.
Which puts the broker in an odd position, and it is worth being honest about it. He must keep serving a client he has just reported, and say nothing about it. That is the job.
How it works
The reporting obligation sits with the broker, not with the exchange. SEBI intermediaries must monitor client transactions to ensure they are not suspicious from a money laundering or tax evasion point of view, and report those that are to the Financial Intelligence Unit — a separate intelligence arm under the finance ministry — through the online mechanism the FIU provides.
The workbook names three species of suspicious trade: reversal trades, profit transfer trades, and trades associated with dabba trading.
And it is explicit that the exchange's surveillance does not discharge the broker. The exchange may raise a suspicion about a client's transactions through its own mechanism, but it is the duty of the concerned broker to identify those suspicious transactions through its regular monitoring and report them. Members should not depend solely on directions from the exchange surveillance team or on system-generated alerts; they must have their own robust controls and procedures.
Related obligations run alongside: the client risk categorisation into low, medium and high; enhanced due diligence for non-face-to-face clients, clients with multiple accounts sharing common directors, addresses, email addresses, telephone numbers or signatories, unexplained transfers between such accounts, unusual activity against past patterns, and sudden activity in dormant accounts.
A worked example
Two clients of the same broker, A and B, trade a jeera contract against each other repeatedly over six sessions. Each time A buys and B sells at a price slightly away from the market, and each time the pair is reversed within the day at a price that moves money in one direction.
Across the six sessions the pattern transfers Rs 4,80,000 from A's account to B's — on a commodity where neither has ever taken or given delivery, and where the round turns cost them:
| Cost | Amount |
|---|---|
| Brokerage, both sides, six round turns | say Rs 14,000 |
| CTT at 0.01% on the sale legs | say Rs 2,400 |
| GST at 18% on brokerage | Rs 2,520 |
They have paid roughly Rs 19,000 in costs to move Rs 4,80,000, and they have not expressed a market view at any point. That is not trading; it is a payment dressed as trading.
The broker files a Suspicious Transaction Report with the FIU. He does not call A. He does not call B. He does not warn them by tightening their limits with an explanation, or by asking them to "be careful about reversal trades", which would tip them off just as effectively as saying it outright.
And he files it even if the exchange surveillance team has raised no alert at all — the duty is his.
Why NISM asks about it
Chapter 10 (Code of Conduct and Investor Protection Measures), section 10.2.4. The examinable line is the prohibition itself, and the accompanying one that a member must not rely solely on exchange alerts. Expect also "which of these does not relate to KYC and anti-money laundering" style questions where STR, IPV and the FIU are the correct associations and position limit breaches are not.
Common exam traps
- The broker reports, not the exchange. Exchange surveillance may flag something, but the statutory reporting duty is the member's.
- The FIU sits under the finance ministry, not under SEBI. It is an intelligence arm, not a market regulator.
- Tipping off is illegal in any form, including an indirect hint. Warning a client to avoid reversal trades because "they get reported" is still tipping off.
- Reversal trades and profit transfer trades are suspicious by their pattern, not by their price. A trade matched fairly on the exchange can still be a laundering leg.
- Filing an STR does not end the client relationship. The broker carries on serving the client, silently.
- Suspicious transaction reporting is an AML control; position limit breaches are a risk control. They live in different chapters and different regimes.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Unique Client CodeThe single code a broker assigns to a client once KYC is complete, mapped to that client's PAN and demat account, under which every one of the client's orders must be entered on the exchange.
- Money launderingTurning the proceeds of a crime into money that looks legitimate — classically in three stages, placement, layering and integration — and a standalone offence under section 3 of the PMLA.
- Code of conductThe conduct obligations a broker accepts as a condition of registration — integrity, due skill and care, no manipulation, and a specific list of duties owed to the client and to other brokers.
- Officially valid documentsThe alternatives to Aadhaar accepted as identity evidence for KYC — driving licence, passport, voter ID and the NREGA job card — all of which the client supplies voluntarily.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.