In this article, Shubham Singh of KIIT School of Law, Bhubaneswar discusses All You Need To Know About The Requirement of KYC Norms.

What is KYC?

KYC stands for ‘Know Your Customer’ or ‘Know your Client’. It has been declared as a compulsory process for every bank or financial institution by RBI and is a process to get information about the identity and address of the customer. This process has been made compulsory by RBI before opening an account, to guarantee that there must not be any misuse of any service provided by the banks. As per the order by RBI, banks have to update the KYC details information at regular intervals of 2,8 or 10 years depending on the risk of the profile of the customer.

What is the requirement of KYC?

KYC is aimed to make it easier for the banks and other final institutions to know and understand their customers. Implementation of KYC guidelines for every new bank account was made compulsory by RBI in the year 2002, which came into force from 1st July 2005. KYC Norms were made compulsory, aiming to restrict money laundering and to stop terrorist financing.

RBI issues guidelines for KYC, through Banking Regulation Act, 1949 Section 35A along with Prevention of Money Laundering (Maintenance of Records) Rules, 2005. If there would be any violation or contravention by any bank, it would be subject to penalty under the Bank Regulation Act, 1949.

Types of KYC

• C-KYC

It stands for Central KYC. With uniform norms and inter-usability, central KYC registry across all financial sectors has been set up as a depository for KYC records. This new process, without asking customers to provide multiple KYC undertakings will help banks, mutual funds, brokerage firms and depository participants offer services. After complying with the new CKYC norms, a unified customer identification code is generated, and it will be used whenever KYC will be required. This initiative has been started for the purpose of centralising and streamlining KYC process. Duplication of KYC will be avoided after this, less scope of forgery will be there. The government has authorised the Central Registry of Securitization Asset Reconstruction and Security Interest of India(CERSAI) for performing the functions of Central KYC Records Registry(CKYCR), also the duty of receiving the details and safely storing them and retrieving the KYC records in the digital form of a ‘client’. Earlier customers have to provide KYC documents separately to every financial institution but after the introduction of one-time centralisation process, CKYC, customers will only have to complete the process once and it can be used for all different processes like opening savings bank accounts, buying life insurance or investing in mutual fund products.

• e-KYC

e-KYC stands for electronic KYC. The service of e-KYC can only be used by those who have Aadhar numbers. Customers by their own consent needs to authorize their Unique Identification Authority of India (UIDAI), to reveal their identity or address information through biometric authentication to their respective bank branches or business correspondent (BC). After this the UIDAI sends the customers data comprising of customer name, age, gender, and photograph electronically to the bank. It is a valid process for KYC verification and under PML Rules, information provided under e-KYC process will be considered as an ‘Officially Valid Document’.

What are the objectives of KYC Norms?

The main objectives are to:

• Stop money laundering,
• Terrorist financing and,
• To understand their customers to and to avoid any risks in future.

Steps taken by RBI for proper implementation of KYC Norms

When the guidelines regarding KYC were introduced in the year 2002, the proper implementation was not made possible, in order to complete their goal RBI asked banks to adopt some measures for the existing bank accounts also.

Some of these are

• Public Notices were published in the national newspapers.
• Identification was made compulsory for zonal customers.
• Those customers who were not complying with the norms were forwarded with individual notices.
• Also, a final notice for ensuring proper documentation within 7 days from that particular day in the newspapers.

Use of KYC in some Institutions

For Banks While opening an account

While opening a bank account customer need to present any of the 6 identification documents and approved by the government of India.

• PAN Card,
• Passport,
• Driving License,
• Voters’ Identity Card,
• Aadhaar Card issued by UIDAI,
• MGNREGA Job Card.

Any one of these documents containing address is sufficient for opening an account.

• While taking loan:

For taking loans there are other documents that are required to be presented for approval of loan.

For Example, in case of home loans, a bank requires identity proof, residence proof and age proof, bank statements for the last 6 months, salary slips of the last 3 months, certificates of educational qualifications, and others. The requirements of these documents are different for salaried individuals, self employed-businessmen, self employed-professionals ornon-residentt Indians.

• For Companies or Business Entities

Business entities that want to purchase Company Credit Reports (CCR), have to provide any of these documents in the company’s name:

1. Bank Statement,
2. Electric bill,
3. Telephone bill

• For Telecom services such as Airtel

Airtel has started an Aadhaar based e-KYC solution. It is an instant verification process, under which a customer who is taking a new postpaid or prepaid connection, will have to submit and verify themselves using Biometrics, i.e., an iris scan or  a fingerprint scan for using the services. The details given by the customer will be matched with the database of UIDAI instantly, and when the information is validated, the connection will be activated instantly in the name of the customer. The retailer or representative will also be registered under Aadhaar and the process will be fully secure.

Key criteria of KYC policy

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

These are careful measures, taken by banks and financial institutions for ensuring that no fraud take place regarding any transactions taking place in the banks. Proper checking of documents will be done in order to complete the requirement of KYC Norms.

There will be variation in the procedure for the normal customer and the customer who use the service through the Internet or Mobile Banking, for the proper understanding of its customers by the banks.

For foreign students, non-resident accounts can be operated but there are special procedures relating to it.

If the customer will not comply with the bank then it could result in the freezing of the customer’s account. The policy says that 3-month prior notice stating the subject matter must be forwarded to the concerned customer, the bank can partially freeze the account if the notice has been given. All the credits and debits will be prohibited so that the account could not be operated further. It will depend upon the bank to either close that account or not, but the bank is obligated to mention the reason for closing the bank account.

If the bank would find a suspicious account i.e., if the identity of the account holder would be false or unclear, then the bank must file a Suspicious Transaction Report (STR) at Financial Intelligent Unit of, Department of Revenue, Ministry of Finance, Government of India.

What are the risks involved due to KYC?

There are different types of risk involved for the banks in the proper implementation of KYC:

1. Reputational Risk

Some instances like if a terrorist resort to identity theft and if they open a bank account in a particular bank and later on if the public will come to know about it then this would create a sense of insecurity among the public and this would harm the bank’s reputation and it would be hard for the bank to attract customers in future. Hence, banks must keep proper care of the norms.

2. Operational Risk

This can be considered as a risk of loss due to failed internal processes of the bank, people, and systems or also from external events.

3. The Risk that arises legally:

If some business or a bank would get involved with any illegal activity it will attract penalties and adjudications also. If a body does not follow KYC norm it would be subject to penalty.

4. Financial Risks:

If a bank without complying with KYC Norms, gives loan to a customer and later the bank fails to identify the customer then it will be hard for the bank to retrieve its money, so it will result in a financial loss.

5. Concentration Risk:

With an aim to attract more customers its usual tendency of banks to focus more on a particular geographical area or involve in a particular kind of business activity. It would lead to great risk if there will be any sudden downfall in that focused area.

Documents required from the customers:

For identifying a customer, documents are very important. The documents varies for Banks, Companies, Partnership firms, and so on.

For Individual Accounts:

For opening an individual account, 6 documents are declared as ‘Officially Valid Documents’ by Government of India that can be presented as proof of identity which are:

• PAN Card,
• Passport,
• Driving License,
• Voters’ Identity Card,
• Aadhaar Card issued by UIDAI,
• MGNREGA Job Card.

A customer needs to submit only one of these documents as proof of identity. If the document also has the address on it, then it would also be considered as proof of address.

Accounts for Companies

In the case of companies, they open Current accounts and the required documents are:

• Certificate of Incorporation
• Memorandum of Association
• Any resolution made by the Board of Directors or any official valid document with respect to the managers, officers,employees etc.

Accounts for Partnership Firms

Partnership deed, registration certificate.

Trust Accounts

Trust Deed and a registration certificate.

Accounts of Unincorporated Associations:

Any official document made with respect to the company or any document which in turn dictates the companies legal existence can be considered as sufficient because in case of unincorporated associations a registration certificate cannot be obtained.

Proprietors Accounts:

In case of proprietorship account all certificates relating to tax liability, VAT, registration, license certificates, Sales or Income Tax returns are needed to be submitted. Extra care is involved in it as proprietorship hold huge amounts and operate huge sum transactions which has to be looked upon.

Rulings of RBI

Earlier AXIS Bank, ICICI Bank and HDFC Bank all three of them were fined with Rs. 5 crores, 1 crore and 4.5 crores respectively by the Reserve Bank of India for violating norms of KYC. After investigation RBI found that these banks did not stick to some of KYC norms and also Anti Money Laundering (AML) guidelines like risk categorisation of account holders and periodical review of the risk profiling. In the investigation it also came under notice of RBI that these banks were not filing Cash Transaction Reports (CTRs) with respect to some cash transactions and these banks were also found responsible for selling of gold coins beyond 50,000 rupees for cash.

RBI noticed that in all the three banks internal operations were not up to the mark. These banks were found guilty of not keeping proper record of PAN numbers and from where the funds were deposited in the accounts of account holders. No evidence regarding committing any money laundering was found.

Conclusion

Those banks who are complying with KYC norms are benefiting the customers who are coming from a rural background.

In the beginning when guidelines regarding KYC were issued there was not any awareness about it among the employees or customers, mainly the weaker sections of the society lacked awareness. After this, flexibility was given to submit the compulsory documents slowly aiming the news to reach the larger group.

“KYC norms are customer-friendly and the opinion that in availing banking facilities the norms are an obstruction for people from a rural background is not true”. KYC has ended the lengthy procedures, insisted by the banks. Now, only one identity proof is sufficient for opening a bank account. This initiative by the government helps and benefits the workers and daily workers as it is very difficult for these groups to obtain two different proofs for address and identity because most of these people migrates from one place to another so this step will act as a relief for them.

REFERENCE

1. http://www.legalindia.com/
2. https://rbi.org.in/
3. http://www.dnaindia.com/
4. http://www.airtel.in/
5. http://economictimes.indiatimes.com/