KYC Norms for Banking Services

The know your customer or know your client (KYC) guidelines in financial services requires that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a bank’s Anti-Money Laundering (AML) policy.

KYC is an acronym for “Know your Customer” a term used for Customer identification process. It involves making reasonable efforts to determine, the true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc which in turn helps the banks to manage their risks prudently.

The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering.

KYC processes are also employed by companies of all sizes for the purpose of ensuring their proposed customers, agents, consultants, or distributors are anti-bribery compliant, and are actually who they claim to be. Banks, insurers, export creditors and other financial institutions are increasingly demanding that customers provide detailed due diligence information. Initially, these regulations were imposed only on the financial institutions but now the non-financial industry, fintech, virtual assets dealers, and even the non-profit organizations are liable to oblige.

Standards

The objective of KYC guidelines is to prevent businesses from being used by criminal elements for money laundering. Related procedures also enable businesses to better understand their customers and their financial dealings. This helps them manage their risks in a well-judged manner. Today, KYC principles apply to banks as well as different online businesses. They usually frame their KYC policies incorporating the following four key elements:

• Customer acceptance policy
• Customer identification procedures
• Monitoring of transactions
• Risk management.

The stringent regulatory environment establishes KYC as a mandatory and crucial procedure for financial institutions as well as non-financial institutions. As it minimizes the risk of fraud, by identifying suspicious elements earlier on in the client-business relationship. For the purposes of a KYC policy, a customer/user may be defined as:

• A person or entity that maintains an account or has a business relationship with the reporting entity;
• one on whose behalf the account is maintained (i.e. The beneficial owner);
• beneficiaries of transactions conducted by professional intermediaries such as stockbrokers, chartered accountants, or solicitors, as permitted under the law; or
• any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, for example, a wire transfer or issue of a high-value demand draft as a single transaction.

KYCC

KYCC or Know Your Customer’s Customer is a process that identifies a customer’s customer activities and nature. This includes the identification of those people, assessing their associated risk levels and associated activities the customer’s customer (business) is involved in.

KYCC is a derivative of the standard KYC process, that was necessitated from the growing risk of fraud originating from fraudulent individuals or companies, that might otherwise be hiding in second-tier business relationships. i.e. (a customer’s customer).

KYB

Know Your Business or simply KYB is an extension of KYC laws implemented to reduce money laundering. KYB is a set of practices to verify a business. It includes verification of registration credentials, location, the UBOs (Ultimate Beneficial Owners) of that business, etc. Also, the business is screened against blacklists and grey lists to check that it was involved in any sort of criminal activity such as money laundering, terrorist financing, corruption, etc. KYB is significant in identifying fake business entities and shell companies. it is crucial for efficient KYC and AML compliance.

Customer Identification Procedure

Customer identification means identifying the customer and verifying his/her identity through reliable and independent documents, data and information. Banks would need to satisfy to the competent authorities that due diligence was observed in accordance with the requirements of existing laws and regulations.

When does KYC apply

KYC will be carried out for the following but is not limited to:

• Opening a new account. (deposit/lending)
• Opening a subsequent account where documents as per current KYC standards not submitted while opening the initial account.
• When the bank feels it is necessary to obtain additional information from existing customers based on the conduct of the account.
• After periodic intervals based on instructions received from RBI.

Features to be verified and documents required to be obtained from customers?

The features to be verified and documents that may be obtained vary depending upon the type of customers. The same are furnished below:

Features Documents 1.0 Accounts of individuals

Legal name and any other names used

i) Passport

ii) PAN Card

iii) Voter’s Identity Card

iv) Driving License

v) Identity Card (Subject to the bank’s satisfaction)

vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank

1.2 Correct permanent address

i) Telephone bill (not older than 3 months)

ii) Bank account statement /Pass Book

iii) Letter from any recognized public authority

iv) Electricity bill (not older than 3 months)

v) Ration Card

vi) Letter from employer (Subject to satisfaction of the bank)

• Accounts of Companies
• Name of the Company
• Principal place of business
• Mailing address of the company
• T e l e p h o n e / F a x number

i) Certificate of incorporation and Memorandum & Articles of Association.

ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account.

iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf

iv) Copy of PAN allotment letter

v) Any officially valid document establishing the proof of existence and proof of address of the entity to the satisfaction of the bank.

vi) Certificate of Commencement of Business.

1. Accounts of Partnership firms

• Legal name
• Address
• Names of all partners and their addresses
• Telephone numbers of the firm and partners

i) Registration certificate, if registered.

ii) Partnership deed

iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf

iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses

v) Proof of existence & proof of address of the firm.

4.0 Accounts of Trusts & Societies

4.1 Names of trustees, settlers, beneficiaries and signatories

4.2 Name and addresses of the founder, the managers / Directors and the beneficiaries

4.3 T e l e p h o n e / F a x Numbers

i) Certificate of registration, if registered.

ii) Power of Attorney granted to transact business on its behalf

iii) Any officially valid document to identify the trustees, settlers, beneficiaries and those holding Power of Attorney, founders/managers / directors and their addresses.

iv) Resolution of the managing body of the foundation/association

v) Any officially valid document establishing the proof of existence and proof of address of the entity to the satisfaction of the bank.