Know Your Customer (KYC)

Know Your Customer (KYC) is a procedure by which banks can obtain information and details about the identity and address of the customers. This procedure helps to safeguard the banks' services are not misused. The KYC procedure has to be completed by the banks while opening accounts and also periodically update the same.

Objective

The objective of KYC/ CFT/ AML/ guidelines is to avert banks/ FIs from being used, intentionally or unintentionally by criminal elements for terrorist financing activities or for money launderings. These procedures also enable banks/ FIs to know and understand their customers and their financial dealings better and to manage their risks wisely.

KYC Norms and Obligations of Banks

Banks and financial institutions (FIs) have been directed to follow certain customer identification procedure for opening of accounts and to monitor transactions of suspicious nature for the purpose of reporting the same to the concerned authority. These 'Know Your Customer' guidelines are revisited in the context of the recommendations that are created by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) Standards on Combating Financing of Terrorism (CFT). The KYC norms for different types of accounts are as follows:

KYC Policy

Every bank has a Know Your Customer (KYC) policy that is duly approved by the Board of Directors of UCBs or any committee of the Board to which the power has been delegated.

Elements of KYC Policy

The KYC policy includes four key elements. They are

Customer Acceptance Policy
Risk Management
Customer Identification Procedures (CIP)
Monitoring of Transactions

Designated Director

A Designated Director is a person who is proposed by the Board. The name, address and designation of the Designated Director would be communicated to the FIU-IND. There are no cases, where the Principal Officer would be nominated as the Designated Director.

Principal Officer

The Principal Officer is the person who is responsible for ensuring compliance, monitoring transactions, sharing and reporting information that is required as per the law and regulations. The name, address and designation of the Principal Officer would be communicated to the FIU-IND.

Compliance of KYC Policy

UCBs safeguards the compliance with KYC policy via

Specifying as to who comprises 'Senior Management' for the cause of KYC compliance.
Allotment of responsibility for effective implementation of policies and procedures.
Independent evaluation of the compliance functions of UCBs' policies and procedures with the inclusion of legal and regulatory requirements.
A concurrent/ internal audit system for verification of the compliance with AML/ KYC procedures and policies.
Submission of the quarterly audit notes and compliance to the Audit Committee.

Customer Acceptance Policy

UCBs shall establish a Customer Acceptance Policy and ensures the following.

No account is opened in a benami/ anonymous or fictitious name.
No account is opened if the RE is unable to apply appropriate CDD measures, either because of non-cooperation of the customer or non-reliability of the documents/ information that is furnished by the customer.
No transaction or account pertaining to the relationship that is undertaken without following the CDD procedure.
The necessary information to be sought for KYC purpose during the opening of an account and the periodic updation is specified.
Optional/ additional information is obtained with the explicit consent once the customer opens an account.
CDD procedure can be used for all the joint account holders, during the opening of a joint account.
Circumstances, when a customer is allowed to act on behalf of another person/ entity, is clearly spelt out.
A suitable system is put in place to make sure that the identity of the customer does not tie up with any person or entity whose name appears in the sanctions lists that are circulated by the Reserve Bank of India.

Customer Acceptance Policy does not result in the denial of banking/ financial facility to members of the general public, particularly the individuals who are financially or socially disadvantaged.

Risk Management

UCBs have a risk-based approach that includes the following.

Customers would be categorised as low, medium and high-risk category depending on the assessment and risk perception of the RE.
Risk categorisation would be undertaken based on the parameters such as a customer's identity, nature of business activity, social/ financial status and information about the clients' business and their location, etc.

Provided that several other information that is collected from different categories of the customers pertaining to the perceived risk, is non-intrusive and the same is mentioned in the KYC policy. FATF Public Statement, guidance notes and the reports on AML/ KYC that is issued by the Indian Banks Association (IBA), guidance note that is circulated to all cooperative banks by the RBI etc, shall also be used in the risk assessment.

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Frequently Asked Questions

Common questions about Know Your Customer Compliance in Banking Standards.

The primary objective of KYC/CFT/AML guidelines is to prevent banks and financial institutions from being used, intentionally or unintentionally, for money laundering activities or financing of terrorism. These procedures also help banks and FIs to understand their customers and their financial dealings better, enabling them to manage risks more effectively.

According to the article, a bank's KYC policy typically includes four key elements: Customer Acceptance Policy, Risk Management, Customer Identification Procedures (CIP), and Monitoring of Transactions.

A Designated Director is a person proposed by the bank's Board of Directors and is responsible for ensuring compliance with KYC norms. The name, address, and designation of the Designated Director must be communicated to the Financial Intelligence Unit (FIU-IND).

The Principal Officer is responsible for ensuring compliance with KYC policies, monitoring transactions, sharing and reporting information as required by law and regulations. Their name, address, and designation must also be communicated to the FIU-IND.

Banks ensure compliance with KYC policies through various measures, such as specifying who comprises 'Senior Management' for KYC compliance, allocating responsibilities for effective implementation, conducting independent evaluations and internal audits, and submitting quarterly audit notes and compliance reports to the Audit Committee.

The Customer Acceptance Policy should ensure that no account is opened in a fictitious or anonymous name, no account is opened without proper Customer Due Diligence (CDD) measures, and necessary information for KYC purposes is obtained during account opening and periodic updates.

Banks categorize customers as low, medium, or high-risk based on their assessment and risk perception, considering factors such as the customer's identity, nature of business, social/financial status, location, and other relevant information.

Banks can also use FATF public statements, guidance notes, and reports on AML/KYC issued by the Indian Banks Association (IBA), guidance notes circulated by the RBI, and other relevant sources for risk assessment purposes.

Customer Identification Procedures (CIP) are part of the KYC policy and are designed to ensure that banks can accurately identify and verify the identity of their customers, as well as beneficial owners, before opening an account or conducting transactions.

Monitoring of transactions is a crucial element of KYC compliance, as it helps banks detect and report suspicious or potentially illegal activities, such as money laundering or terrorist financing, to the relevant authorities.