Know Your Customer (KYC)
As per RBI guidelines, it is mandatory for the banks to ensure KYC norms for all the customers duly collecting full information of the account holder, type of transactions to be conducted, sources of funds and other relevant matters at the entry level itself. The policy guidelines are to be adhered not only to new accounts but also to the existing accounts. The guidelines are applicable to all types of deposit and advance accounts as well as new technology products such as Credit, Debit, Smart, Add-on cards. The objective of KYC is to insulate banking from unscrupulous participants and to avert misuse/undue advantage of system. The key elements of the policy are
- Customer Acceptance Policy (CAP): Bank should obtain prescribed application from the applicant along with the documents/information that is required as per constitution, risk perception, banking practices, legal requirements and RBI guidelines. Banks should not open accounts in the name of Anonymous or fictitious/benami names and Terrorist organizations notified under POTA.
- Customer Identification Procedure (CIP): It means collecting information relating to identity, activity, location of the person desiring to open an account in single name or in joint names and verifying the information collected using reliable, independent source documents, data or information. Banks are advised to accept any of the document mentioned in the list can take as valid identification. In case of a married woman, her identity proof with maiden name, if supported with marriage certificate could be considered a valid ID proof. With regard to opening of Partnership, Company, Trust, Club, Association, or any other legal body accounts, branch should obtain required information/documents to verify the legal status of the applicant. In case of proprietary concerns, copy of registration/licensed document issued by government agencies shall be accepted as valid identification document.
Address proof: Banks are advised to obtain any one of the documents mentioned in the list can be accepted as valid address proof.
|Documents - Identity Proof||Documents – Residence Proof|
Note: If passport having current address is given as proof of identity, there is no need to give separate proof for address.
KYC verification of all the members of SHGs need not be done while opening the SB account of SHG and KYC verification of all the office bearers would suffice. With regard to opening of accounts in the name of proprietary concern, they are required to submit complete income tax return of the sole proprietor where the firm’s income is reflected along with copy of any of the utility bills such as electricity, water, telephone bills in the name proprietary concern.
Foreign Students: Banks are permitted to open resident accounts in the name foreign students studying in India with ATM card facility by obtaining documents viz., Pass Port, Valid Visa with photograph, Proof of Admission – Letter from University/College, Address Proof – A letter from College/Hostel or certificate from embassy or any certification of registration issued by Foreigner Registration Regional Office (FRRO).
Common man is facing hardships while opening Bank account on account of adherence of stringent KYC norms. To address the associate issues, RBI advised banks to accept utility bill (Telephone/Electricity Bill) or any other document acceptable to establish address proof. However, banks to obtain declaration from the person (Father/Mother/Spouse/Son/Daughter) with whom the prospective customer is staying. In case of small value accounts branches are allowed to open accounts without insisting for proof of identification/address on proper introduction of another bank customer. With regard to the migratory workers, branches to open accounts by obtaining photo and permanent residential address with introduction.
Banks are advised to accept “Aadhaar” number issued by the Unique Identification authority of India (UIDAI) as a proof of identity but not of address for opening of accounts. According to the new guidelines, if the address on the document submitted for identity proof by the prospective customer is the same as that declared in the account opening form, the document may be accepted as a valid proof for identity and address.
KYC once done by one branch of the bank should be valid for transfer of the account within the bank provided the customer submits his address proof at new place. This is causing inconvenience to many customers. To address the issue, RBI permitted the banks to obtain self declaration from the account holder about his/her current address, however, the address proof is to be submitted within 6 months.
iii) Due Diligence: All the forms and documents submitted by the applicant while opening of the account are to be verified by the officer with the originals to ensure that the identification and address of the applicant is correct. Further, the officer should satisfy with the identity and legal existence of the applicant and note the same in the interview cum due diligence form. Further, the guidelines also stipulate sending a letter to the customer in the prescribed format on the same day of opening of the account.
iv) Risk Categorization: RBI advised the banks to classify the accounts into Low, Medium and High Risk categories based on the risk perception while opening of accounts and further reviewed once in 6 months. As per the existing guidelines, customer identification data (including photos) is to be updated once in 5 years in case of Low Risk Category Customers and once in 2 years in case of Medium and High Risk category customers.
Monitoring of transactions: Banks are expected to fix threshold limit and monitor the transactions closely and ongoing basis. It covers monitoring of high risk accounts, NRE accounts, accounts with high turnover, large amount of cash transactions and Periodical review and reporting of the transactions to appropriate law enforcing authority.
Non face to face customers: With the introduction of telephone and electronic banking, increasingly accounts are being opened by banks for customers without the need for the customer to visit the bank branch. In such cases, apart from applying the usual customer identification procedures, there must be specific and adequate procedures to mitigate the higher risk involved. Certification of all the documents presented may be insisted upon and, if necessary, additional documents may be called for. In such cases, banks may also require the first payment to be effected through the customer’s account with another bank which, in turn, adheres to similar KYC standards. In the case of cross-border customers, the bank may have to rely on third party certification/introduction.
Money Laundering: It is the process of transferring illegitimate money into legitimate money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to reappear as legitimate income. It normally follows from such activities as human trafficking, sale of narcotic drugs, illegal dealings in arms and ammunition etc. It is a threat to the national security and economic activity as it often associates with the financing of terrorism and also evasion of taxes. Government of India introduced “Prevention of Money Laundering Act, 2002” and the objectives are – To prevent, combat and control money laundering; To confiscate and seize the property obtained from the laundered money and to deal with any other issue connected with money laundering in India. Banks are required to report the following type of transactions to the Financial Intelligence Unit (FIU), New Delhi.
|Report||Nature of Transactions|
|Cash Transaction Reports (CTR)||a) All cash transactions of the value of more than Rs.10 lakhs. ii) Series of cash transactions integrally connected to each other, which have been valued below Rs.10 lakhs where such series of transactions have taken place within a month and aggregating Rs.10 lakhs. iii) All cash transactions where forged or counterfeit notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place.|
|Suspicious Transaction Report (STR)||i) Multiple accounts under same name iii) Frequent conversion of currency from small to large denomination notes iv) Placing funds in FD and using them as security for more loans v) Large deposits immediately followed by wire transfers|
|Counterfeit Currency Report (CCR)||chest, the same is to be informed to FIU and Reserve Bank of India immediately.|
Preservation of Records: As per Prevention of Money Laundering (Amendment) Act 2009, branches are required to preserve all the transactions for at least 10 years from the date of transaction between the Bank and the client along with the necessary records. Similarly, they need to preserve all the KYC documents obtained at the time of opening and during the course of business relationship for a period of 10 years after the business relationship ended. Reserve Bank of India directed all banks to implement KYC guidelines for new accounts in 2002 and subsequently made it mandatory for all accounts including retail investors with effective from 1st January 2011. It is used by financial institutions and other regulated companies to identify clients and acquire relevant information in order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc. Thus KYC has quickly become an important global due diligence list.