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Know Your Customer

KNOW YOUR CUSTOMER (KYC) is a process by which banks obtain customer information like identity and address to prevent criminal use of bank services and comply with anti-money laundering regulations. It involves verifying customer details when opening accounts and periodically updating records. Guidelines introduced in 2002 require all banks to make accounts KYC compliant. KYC helps banks understand customers and manage risks, and involves policies on customer acceptance, identification, transaction monitoring, and risk management.

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334 views2 pages

Know Your Customer

KNOW YOUR CUSTOMER (KYC) is a process by which banks obtain customer information like identity and address to prevent criminal use of bank services and comply with anti-money laundering regulations. It involves verifying customer details when opening accounts and periodically updating records. Guidelines introduced in 2002 require all banks to make accounts KYC compliant. KYC helps banks understand customers and manage risks, and involves policies on customer acceptance, identification, transaction monitoring, and risk management.

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KNOW YOUR CUSTOMER (KYC)

 KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and
address of the customers.
 This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by
the banks while opening accounts.
 Banks are also required to periodically update their customers’ KYC details.
 KYC guidelines were introduced in year 2002 by RBI and all banks were asked to make all accounts KYC
compliant by 31 December 2005.
 These guidelines are issued under Section 35 A of the Banking Regulation Act, 1949.

Know Your Customer, alternatively known as know your client or simply KYC, is the process of a business verifying the identity of its
clients and assessing their suitability, along with the potential risks of illegal intentions towards the business relationship. The term is
also used to refer to the bank regulations and anti-money laundering regulations which govern these activities. Know your customer
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. Banks, insurers, export creditors and other financial institutions are increasingly demanding that
customers provide detailed due diligence information.

Standards
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money
laundering activities. Related procedures also enable banks to better understand their customers and their financial dealings. This helps
them manage their risks in a well judged manner. Today not only the banks but also different online businesses can implement KYC.
They usually frame their KYC policies incorporating the following four key elements:

 Customer Acceptance Policy;


 Customer Identification Procedures;
 Monitoring of Transactions; and
 Risk management.
The stringent regulatory environment establishes KYC as a mandatory and crucial procedure for financial institutions. As it minimises
the risk of fraud, by identifying suspicious elements earlier on in the client-business relationship lifecycle. For the purposes of a KYC
policy, a customer/user may be defined as:

 a person or entity that maintains an account and/or has a business relationship with the bank;
 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

Typical controls
KYC controls typically include the following:

 Collection and analysis of basic personally identifiable information (PII).


 Screening of identity particulars against global watch-lists to determine the status of public exposure (politically exposed person or
PEP) and adverse media.
 Determination of the customer's risk in terms of the tendency to commit money laundering, terrorist finance, or identity theft.
 Creation and assessment of a 'Customer Profile' on the basis of a customer's transactional behaviour
 Monitoring of a customer's transactions against expected behaviour and recorded profile as well as that of the customer's peers

KYC Documents:
These are the documents used to establish customer’s identity. Banks need two types of document one for identity
another for address along with a recent photograph.
‘Officially Valid Documents’ (OVDs)
The Government of India has notified six documents as ‘Officially Valid Documents’ (OVDs) for the purpose of
producing proof of identity.

These are

Passport,

Driving Licence,

Voters’ Identity Card,

PAN Card,

Aadhaar Card If the document submitted by you for proof of identity does not contain address details, then you will have
to submit another officially valid document which contains address details.

E-KYC
e-KYC refers to electronic KYC. e-KYC is possible only for those who have Aadhaar numbers. While using e-KYC
service, you have to authorise the Unique Identification Authority of India (UIDAI), by explicit consent, to release your
identity/address through biometric authentication to the bank branches/business correspondent (BC).

The UIDAI then transfers your data comprising your name, age, gender, and photograph electronically to the bank.

Information thus provided through e-KYC process is permitted to be treated as an ‘Officially Valid Document’ under
PML(Prevention of Money Laundering) Rules and is a valid process for KYC verification.

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