(Last updated on August 04, 2024)
Know Your Customer (KYC) standards are designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. KYC involves several steps to: establish customer identity; understand the nature of customers’ activities and qualify that the source of funds is legitimate;
KYC involves several steps to (i) establish customer identity (ii)understand the nature of customers’ activities and qualify that the source of funds is legitimate, and (iii) assess money laundering risks associated with customers.
The KYC norms in banking, as outlined by the RBI, are a set of procedures and rules that these institutions must follow to verify the identity and address of their customers. This process involves collecting and verifying documents that prove a customer’s identity and residential address.
RBI guidelines:
KYC norms refer to the regulatory and legal framework that financial institutions must follow to verify the identity, suitability, and risks involved with maintaining a business relationship with the customer. The process involves collecting and verifying the personal details of customers, such as name, address, contact details, and other identifying information. The essence of KYC is not just about knowing who your customers are but also about understanding their financial dealings to mitigate risks effectively.
When it comes to KYC validation, the RBI mandates the submission of specific documents as proof of identity and address. For most individuals, an Aadhaar card or PAN card, along with a recent photograph, suffices. However, in instances where these documents are unavailable, alternatives like passports, driving licenses, or utility bills can be utilized. The flexibility in documentation caters to a wide array of customer scenarios, ensuring that no one is left out from accessing banking services due to the lack of specific documents.
The Reserve Bank of India (RBI), vide its Master Direction dated 17th October 2023 amended the Know Your Customer (KYC), 2016. The amendments have tightened the norms of customer due diligence by ensuring a risk-based approach for periodic updates in the KYC information of the customers by the Banks and Regulated Entities (RE).
The amendments are made in line with the recent amendments to the Prevention of Money Laundering (PML) Rules, Unlawful Activities (Prevention) Act (UAPA), 1967, and Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. The FATF Recommendations are also considered by RBI for the amendments. The amendments have been made effective immediately by the RBI.
Major Amendments
The following major changes have been made by the RBI through the amendment:
1. Section 3: The definition of Customer Due diligence under Section 3(v) (b) of the MD has been amended by appending the words “using reliable and independent sources of identification” to ensure reliability in identification. Further, an explanation has also been added to the sub-section to ensure reliable sources of identification of customers, taking reasonable steps to understand the nature of business of the customers and identifying the beneficial owner.
Among other changes in section 3, change has been made to bring Asset Reconstruction Companies along with every Regulated Entity (RE) under the application of the MD.
2. Section 4: Clause(b) of the section has been amended in line with the PMLA Rules where the groups are required to implement policies for discharging the obligations of the group under Chapter IV of the PMLA Act. Therefore, every RE shall implement group-wide policies to facilitate the sharing of information necessary for client due diligence, PMLA requirements, and terror risk management. It is also relevant to safeguard the confidentiality of any such information exchanged for these purposes.
3. Section 5A: Clause (b) of Section 5A is amended to provide the option to REs that the periodicity of the ML/TF risk assessment exercise may be determined by, either the ‘Board of the RE’ or a Committee of the Board to which the power is delegated.
4. Section 5B: The RBI has replaced clause (d) of section 5A with Section 5B to introduce a Risk-Based Approach (RBA) to be followed by the REs to implement a CDD program which shall take into regard the ML/TF risks identified and the size of business, for mitigation and management of the identified risk and should have Board approved policies, controls, and procedures in this regard.
1. Section 10: The RBI under clause (b) has added a provision for the REs to file a Suspicious Transaction Report (STR) if required in case of inability to comply with CDD requirements from the customer.
2. Section 24: the RBI has introduced monitoring of accounts through the addition of clause (h) to the section and has directed to identify customers as per section 16 or 18 in case of suspicion of ML/TF activities.
3. Section 38: the RBI has amended the section to direct REs to adopt a risk-based approach for periodic updation of KYC which shall ensure that the information collected under CDD is updated and relevant specifically in case of high-risks.
4. Section 41: The RBI has laid guidelines for REs for the CDD of Politically Exposed Persons (PEPs) by amending section 41 to determine the status of beneficial owners, their source of wealth, and other such requirements from senior management. Further, the instructions laid under the section shall also apply to the family members or close associates of PEPs.
5. Section 54: The RBI has amended section 54 in line with the FATF recommendations and the section now requires REs to apply enhanced due diligence which is proportionate and effective to the risks, to business relations and transactions involving natural and legal persons from jurisdictions for which such risks are called for by the FATF.
6. Section 59: The RBI has amended section 59 to mandate the Banks to use diligence procedures and careful observation to spot accounts used as money mule accounts. Once they have identified such accounts, they must take the necessary steps, which may include reporting suspicious activities to FIU-IND.
KYC is necessary for opening and maintaining current accounts of individuals, proprietorships, partnership firms, corporates, trusts, Associations, societies, clubs, etc. When the bank accounts of individuals are opened, banks mainly look into the identity and address proof of the applicant such as official valid documents (OVDs) like Aadhar card, Voter ID, PAN card, Driving License, Passport, NREGA Job card, etc. If some other person is operating on behalf of the account holder as a mandate holder or power of attorney, the OVDs of such persons are also verified by the banks. In the cases of legal persons/entities (other than non-natural persons), banks open the accounts only after verifying the legal status of the entity, identities of promoters/directors/controllers, and authorized signatories of the account. If the officially valid document submitted for opening a bank account has both, the identity and address of the person, there is no need for submitting any other documentary proof separately for the purpose. In all cases of account opening, photographs of the persons opening and operating the account shall be submitted to the bank. Accounts opened by other banks, Local Authorities, and Government Departments (excluding public sector undertakings or quasi-government bodies) are exempted from the requirement of photographs.
As per RBI guidelines, in addition to seeking NOC from the existing bankers of the prospective current account customer, banks should seek information from CRILC and verify the data received from the CRILC, whether the prospective customer is enjoying credit facilities from another bank. Also, banks have to seek a ‘No Objection Certificate’ from the drawee bank where the initial deposit to the current account is made by way of a cheque.
Banks prescribe threshold limits for a particular category/categories of accounts based on risk perception as low risk, medium risk, high risk, exceptionally high risk, etc., and fix the risk level threshold limit to each account to monitor transactions of cash and transactions of suspicious nature in the account and report it to the appropriate authority as per KYC norms/AML standard.
The KYC documents obtained by banks for various categories of accounts are as follows.
To open a bank account, by individuals, one needs to submit a ‘proof of identity and proof of address’ together with a recent photograph. The Government of India has notified six documents as ‘Officially Valid Documents (OVDs) to produce proof of identity. These six documents are a Passport, Driving Licence, voter’s Identity Card, PAN Card, Aadhaar Card issued by UIDAI, and NREGA Card. You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then they would be accepted as ‘proof of address’. If the document submitted by the customer for proof of identity does not contain address details, then he/she will have to submit another officially valid document which contains address details.
Proprietary concerns:
- Identity and address proof of the proprietor with Telephone/Fax Number/email address,
- Any two of the below documents would suffice. These documents should be in the name of the proprietary concern.
- If the firm is in the business of import & export, the IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT
- Licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute.
- Proof of the legal name of the firm such as Business Registration certificate, Shops & Establishments Registration certificate, Factory Registration certificate Sales Tax Registration/ Service Tax Registration, etc.
- Sales and income tax returns
Partnership firms;
- Copy of the Partnership deed,
- Proof of registered address of the firm,
- Proof of correspondence address of the firm along with Telephone/Fax Number/email address
- Names of all partners, their addresses and Telephone numbers,
- Proof of the legal name of the firm such as Business Registration certificate, Shops & Establishments Registration certificate, Factory Registration certificate Sales Tax Registration/ Service Tax Registration, etc.
- A letter of authority or Power of Attorney is granted if the firm has authorized any of its employees to transact business on behalf of the firm, along with identity and address proof of such authorized persons.
Companies:
- Certified copy of Certificate of incorporation/Registration certificate of the company,
- Evidence of registered address,
- Proof of correspondence address of the company (telephone bill) along with Telephone/Fax Number/email address
- Certificate of Incorporation and Memorandum & Articles of Association,
- PAN card proof of the company
- Latest Annual Return with the ROC acknowledgment,
- List of Directors and the Form 32s supporting their director status,
- Resolution of the Board of Directors to open an account and identification of those (including employees) who have the authority to operate the account,
- Identity and address proof of authorized signatories, Managing Director, Chairman and signatories to the Board Resolution
- In the cases of unlisted companies or entities listed on a non-approved stock exchange; OVDs of ultimate individual shareholders holding 10% and above capital of the company.
- Also KYC for any company which is a significant shareholder of this company.
Trusts & foundations
- Copy of the Trust deed,
- Registration certificate of the Trust,
- If the Trust is not registered, PAN Number/Acknowledgement copy of Income Tax return,
- Certified copy of the resolution regarding the opening and operation of the account.
- Details of all the present trustees, settlers, beneficiaries, and signatories with their identity and address proof,
- A copy of the power of attorney is granted to any employees to transact business with the trust.
- Registered & communication address of the Trust with Telephone/fax number/e-mail address.
Body of individuals (includes societies, educational institutions, Associations, Clubs, etc.)
- A Certified true copy of the Rules, Regulations, and Bye-laws (as the case may be certified true copy of Certificate of Registration or incorporation in the case of registered bodies (o
- A certified true copy of the Resolution to open the bank account (certified by the Chairman of the meeting of the Governing Board or Managing committee or like body, at which resolution was passed), with the list of office-bearers authorised to operate the account by the Rules and Bye-laws of the body.
- Photographs of authorised representatives to operate the bank account with their ID & Address proofs.
- A copy of the balance sheet in the case of a cooperative society, if available.
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