Know Your Customer (KYC) in Banking

Know Your Customer (KYC)

• KYC is necessary to identify and know the customer properly before opening an account, to prevent misuse and ensure responsibility.
• The bank needs to take basic precautions before opening an account, as it takes on the responsibility of collecting cheques on the customer's behalf.
• There should be no shortcuts or deviations in the KYC procedure, as it may lead to financial loss and prevent the bank from getting protection under section 131 of the Negotiable Instruments Act, 1881.

KYC Norms

• KYC norms help the bank know and understand the customer and their financial dealings better, enabling the bank to monitor the account and manage risk more effectively.
• KYC rules are a derivative of the following acts and rules:
  • Prevention of Money Laundering Act, 2002 (PMLA)
  • Financial Action Task Force (FATF)
  • Combating Financing of Terrorism
  • Reserve Bank of India guidelines

Four Points of KYC Norms

• Customer Acceptance Policy
• Customer Identification Procedures
• Monitoring of Transactions
• Risk Management

Definition of a Customer

• A person who maintains an account or has a business relationship with the bank.
• A person on whose behalf the account is maintained (beneficial owner).
• Any person or entity connected with a financial transaction that can pose significant financial, reputational, or other risks to the bank.

Beneficial Owner

• A natural person who ultimately owns or controls a client and/or the person on whose behalf the transaction is being conducted.
• Includes a person who exercises ultimate control over a firm, company, or legal entity.

Customer Acceptance Policy (CAP)

• The Reserve Bank of India has directed each bank to have its own Customer Acceptance Policy within the regulatory framework.
• Each bank's customer acceptance policy is clear and permits the bank to decide the customer profile they are comfortable with.
• The minimum balance requirement of each bank is decided by the profile they choose to accept as policy.### Risk Grading of Customers
• Customers are categorized into three risk categories: Low Risk, Medium Risk, and High Risk
• Politically connected persons are graded under the highest risk category, requiring constant monitoring
• Additional documentation is obtained depending on the risk level of the customer

Customer Due Diligence (CDD)

• CDD is defined as any measure undertaken to collect and verify information to positively establish the identity of a customer
• CDD is required when:
  • A customer establishes a business relationship
  • A customer carries out an occasional transaction
  • A transaction is suspected
  • The authenticity of the documents is doubted
• If CDD cannot be applied, the bank should not establish a business relationship, carry out the transaction, or terminate existing relationships

Types of Customer Due Diligence

• Basic Due Diligence: collecting basic KYC documents like Pan card/Driving license and address documents
• Simplified Due Diligence: for low-income individuals or NO FRILLS accounts, requiring only a photograph and an introduction from an existing account holder
• Enhanced Due Diligence: for high-risk customers, involving an enhanced level of monitoring

Customer Identification

• Customer identification involves identifying the customer and verifying their identity using reliable, independent source documents, data, or information
• A latest photograph of the customer is required
• Sufficient information is needed to establish the identity of each new customer and the purpose of the intended nature of banking relationship

Documents Required

• Documents required depend on the type of customer (individual, corporate, partnership firm, etc.)
• Documents include identity proof, address proof, and legal status verification
• Examples of documents required:
  • Individuals: Pan Card/Driving License/Passport or Election card for identification and phone/electricity bill for address verification
  • Partnership firm: partnership deed, valid business license, and identity/address proof of each partner

Monitoring of Transactions

• Monitoring of transactions is dependent on the risk profile of the customer
• Higher-risk customers require more stringent monitoring of their accounts
• Transactions are monitored through:
  • CTR or Cash Transaction Reports
  • STR or Suspicious Transaction Reports
  • CCR or Counterfeit Currency Reports
  • Report on Transactions in NPO A/cs (Non-Profit Organizations)

Reporting

• All new accounts opened are subject to monitoring for a period of six months

• Cash transactions of Rs. 10 lacs or more are subject to scrutiny

• Reports are generated by the Head Office and sent to the respective branches for comments

• The Principal Officer for the bank, DGM, Audit, Inspection & Vigilance, collates the reports### FIU and Reporting

• The FIU (Financial Intelligence Unit) is a central national agency responsible for receiving, processing, analyzing, and disseminating information to various regulatory and enforcement bodies.

• The FIU is controlled by the Finance Ministry.

• Reports are sent to the FIU by the 15th of the succeeding month.

• The FIU is not a regulatory authority but sends information to RBI/CBI/Enforcement Directorate/Income Tax authorities for investigation and follow-up.

KYC Implementation

• KYC procedures require demanding certain information from customers, which may be of personal nature or never been called for before.
• This information is captured through the account opening form.
• Pamphlets and brochures also carry this information to keep customers informed about the objectives of the KYC program.

Identity and Address Proof Documents

• Passport is an ideal document for identity, address, and signature proof, considered to be the most secure document.
• Driving License is only for identity proof, has a validity date, and should not be considered if expired.
• Voters ID card is only for identity proof, has a reputation for spelling mistakes, and may create confusion.
• Government/Defence ID Card is only for identity proof, should be checked for government seal and validity date, and should not be considered if expired.
• ID card of reputed Companies is only for identity proof, should be checked for validity, and should be additionally supported by a letter from the HR of the Company.
• Pan Card is an identity proof document, and its authenticity can be checked through the website DIT - Know Your Pan.
• Electricity Bill, MGL Bill, Telephone Bill, and LIC premium receipt are only address proof documents, should be the latest, and not more than 3 months old.
• Students ID card is an identity proof document, should be supported by a ration card for address proof, and a ration card by itself is not a proof document.
• Copy of Lease agreement is only an address proof document, and the agreement should preferably be a registered agreement.

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