Written by Vatsal Dhar , pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution offered by Lawsikho as part of his coursework. Vatsal is a Legal Professional and a graduate in BBA LLB from Symbiosis Law School, Noida.
KYC i.e. Know Your Customer is a very popular term used in the business sphere. It is a term related to the process of customer identification in which an individual is said to enter into a transaction by opening an account with a financial entity. The entire process of KYC is concerned with gathering certain information from and about the end user, validating, verifying the same information and ensuring that the personal details are fair, genuine and true in every manner. Such verification can be done before entering into a transaction or during any time between the operations of the business.
The rise of KYC policies has been emergent very lately while expanding and becoming very important globally as well. KYC policies have now evolved into an important combat tool against illegal or malafide transactions in the financial sector. KYC helps the companies in protecting themselves by ensuring compliance and maintaining appropriate business standards with legitimate entities. It also helps in protecting the individuals who might otherwise be harmed by financial crime. In recent times, various banking institutions, corporate houses, organizations, credit agency, and insurance companies have become big supporters in adopting the KYC policy as it helps them in verifying their client’s real identity. Also, it helps them in identifying and tackling the issue of money laundering, bribery, concealment of money, terrorist financing and corruption related practices at a much earlier stage than expected.
A customer, individual or an investor can get their respective KYC done through submission of relevant government identity cards and supporting documents such as Permanent Driving License, Aadhar Card, valid Passport, Permanent Account Number (PAN), Voter ID Card, Ration Card, Photo ID, NREGA Card etc. It can also be done through address proof (the property owned by the individual) or by property tax, municipal receipts or in-person verification by self-attesting the same.
There are generally two types of KYC which govern individuals and segregate between them:
In the first type of KYC, it is prescribed by the Central KYC registry (CKYC). It basically includes all the basic and uniform KYC details of the individual or investor as and is said to be used by all registered financial intermediaries.
The second type of KYC comprises of all other additional KYC information as may be sought separately by the financial intermediaries such as a Mutual Fund, stockbroker, depository participant opening the investor’s account.
Procedure/ How does it work
Most financial corporations and institutions initiate their KYC procedures by simply collecting and gathering information about their customers by using electronic identity verification also known as a “Customer Identification Program”. Certain personal information such as name, social security numbers (SSN), PAN no., Aadhar card no., date of birth, address (both permanent and current) can be very useful when determining whether or not an individual had been involved in a financial crime previously or not.
After the data has been collected, it is then compared to different lists of individuals with a criminal record or involved in any kind of corruption practices, names present on sanctions list, Politically Exposed Person (PEP) suspected of being involved with a crime, or at a high risk of partaking in bribery or money laundering.
The bank then measures the risk involving the ratio of the client and how likely they are to become involved in corrupt or illegal activity in near future. Once this calculation has been made, the banks can analyze what the client’s account condition might look like in future going as per current records. All the client’s account activity can be managed and monitored consistently by the bank in case it finds anything to be suspicious or out of place.
Many a time, banks also may compare clients with a similar background, location, job profile, field of expertise and salary. It helps them in analyzing better and comparing people as most of them would have a similar statement record from the other if not exact.
How to check the KYC Status?
One can easily check the KYC status by logging into the website of the following financial services companies with whom their funds are tied up with.
- CDSL Ventures Ltd. CVL – https://www.cvlkra.com/
- NSE (DotEx International) – https://www.nsekra.com/
- NSDL Database Management Ltd (NDML) – https://kra.ndml.in/
- CAMS – https://camskra.com/Home.aspx
- Karvy – https://www.karvykra.com/
What are CKYC Norms?
We now know that Know Your Customer (KYC) is one-time exercise while dealing in securities markets. Central KYC (CKYC) is an initiative by the government to bring all financial sector entities under one single roof. Once a customer has undergone KYC through a SEBI registered intermediary then it is not bound to undergo the same process again and again while approaching another intermediary for its financial services.
To add to the above, the KYC records of the clients are stored, managed and safeguarded in digital form by Central KYC Registry (CKYCR) also known as CERSAI (Central Registry for Securitization Asset Reconstruction and Security Interest of India), an entity substantially owned and controlled by central government. Central KYC Registry is a centralized repository or a register filled with KYC records of customers in the financial sector with uniform KYC norms. Its main objective is to reduce the burden of producing KYC documents each time and getting the same verified every time when the customer creates a new relationship with a financial entity.
Who can get access to CKYC?
The Central KYC application can be accessed by authorized institutions or other notified institutions under the Prevention of Money Laundering Act, 2002 (PMLA) or rules framed by the Government of India (GOI) or any Regulator (RBI, SEBI or IRDA).
Features of CKYC registry
- Acts as a unique KYC identifier linked with independent ID proofs.
- Ensures that the data and documents are stored in a digitally secured electronic format.
- Helps in reducing Substantial cost by avoiding multiplicity of registration and data upkeep.
- Provides secure and advanced user authentication mechanisms for system access.
- ID authentication with issuing authorities like Aadhar/PAN etc.
- Holds regulatory reports to monitor compliance.
Who needs to comply?
The KYC compliance is mandatory for all individuals and citizens under the Prevention of Money Laundering Act, 2002 (PMLA) inclusive of the rules framed thereunder, read along with the SEBI Master Circular guidelines on Anti Money Laundering (AML) and circular on Combating the Financing of Terrorism (CFT) and duties and obligations of Securities Market Intermediaries.
As of now, all investors who wish to make a lump sum investment of fifty thousand (Rs. 50,000) or more have to be KYC Compliant first. Such compliance will also apply to the other mode of investment that is Systematic Investment Plan (SIP) concerned with Mutual Funds which implies that each installment of value greater than or equal to Rs.50, 000 would have to be KYC Compliant.
The following is the list of personnel who need to be KYC compliant before initiating any transaction with the financial institution:
Joint Holders
It may include all active members of the account to be individually KYC compliant before they can invest together in any Mutual Fund. Therefore, all holders need to be KYC compliant and copies of each holder’s KYC Acknowledgement would be then attached to the investment application form
Minors
In case the investor in the picture is a minor or is a person who has not attained majority till date then, the Guardian of minor should be a KYC compliant personnel and should ensure attachment of their KYC Acknowledgement while investing in the name of the minor. However the minor in order to be able to transact further in his own capacity should apply for KYC compliance in his own capacity and intimate the concerned Mutual Fund(s) after attaining majority,
Power of Attorney (PoA) Holder
The KYC compliance is mandatory for both the issuer (i.e. Investor) and the holder (i.e. Attorney) of PoA. Both have to ensure that they are KYC compliant in their independent capacity and must attach their respective KYC Acknowledgements while investing.
Financiers
The financiers who are concerned with providing financial support to the ones in need shall also ensure that they are KYC compliant at the time of Lien Marking.
In case of death of the unit holder
In case of any unforeseen circumstances where the unitholder who is also the sole applicant cease to exist, then the claimant should submit his KYC Acknowledgement along with the other relevant documents to effect the transmission in his favor and get all the remaining.
How do customers benefit?
The following are some of the benefits the CKYC customers shall be entitled to:
It will help in eliminating the repetitive process of KYC registration, again and again, saving financial advisor and financial product manufacturer from completing the KYC process in one go.
It will save them a huge amount of time filling up multiple KYC forms and provide countless self-attested documents.
It will help in convincing clients to invest in a mutual fund, security scheme or a fixed deposit as the action required would be simpler due to the reduction of a barrier.
Customers would also get access to their personal records on CKYC registry and can ask to make updates to their existing records if necessary.
Aadhar Judgement’s say on KYC
The recent Aadhar ruling held that there is no need to link the 12 digits biometric code to with mobile numbers and bank accounts. In this, the Supreme Court struck down Section 57 of the Aadhaar Act that which provided that private companies could ask consumers for Aadhaar details for identification purposes. It is further ruled that the telecom service providers will have to delink the aadhar verification code from mobile numbers so those who had linked their mobile number with Aadhaar may have to provide another identity proof. The ruling also had an impact on the new small finance banks that used Aadhaar to complete the mandatory KYC process for new customers in a quick and cost-efficient way. This is now a time consuming and cost bearing process for both the sectors as well as the consumers. Which initially took 30 minutes, could now take more than a week for completion of the KYC norms.
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