KYC or ‘Know Your Customer’ can be appropriately termed as a substantial tool employed by the banks to either prevent or eradicate the crimes related to finance as well as the laundering of money. It entails a compulsory verification process on the part of the banks or any other institutions related to any financial activities to curb and cause the minimization of illegal activities involving finance. The Reserve Bank of India has declared that no financial transaction can take place through any bank without KYC. The invention of KYC has proved to be quite beneficial for the banking institutions, other financial institutions, export creditors and the companies providing insurance services to make sure that the clients using their services are actually who they claim to be and that these services are not being used for any activity which is deemed illegal by law.
No bank account, savings account, demat account or any other type of account can be opened unless the customer goes through the complete process of KYC. This is as per the guidelines of the Reserve Bank of India. The KYC process involves a complete verification test, conducted by the concerned financial institution of the prospective customer’s identity, residential address, financial conditions, status of residence, business, occupation and any other details that the institution deems necessary.
According to the Reserve Bank of India, KYC is s systematic procedure which aids the banks and other financial institutions in gaining a better and a deeper knowledge of their customer market so that they can elevate their performance and services and bring an improvement in their financial dealings.
Coming to the KYC norms and their obligations, the general guidelines as directed by the Reserve Bank of India involve the responsibility on the part of the Banks and other financial institutions to handle the personal data of the customers carefully and to not divulge it to any outside party. The provisions making up the Foreign Contribution (Regulation) Act of 1976, should be strictly adhered to by all the banks.
It is necessary for the banks to include the following features while framing their KYC policies:
- Customer Acceptance Policy
The regulations laid down by the Reserve Bank of India state that every bank has to frame a customer acceptance policy in explicit terms and words which would govern the relationship between the banks and their customers. The requisites for the policy include the prohibition on opening of an account with an anonymous name. The necessities and requirements of the Prevention of Money Laundering Act, 2005 have to be kept in mind during the collection of documents from the customers while also keeping a consideration of the perceived risks of the client. An imperative check and verification of the client has to be carried out by the bank before the opening of a new account so as to ensure that they do not have a criminal background or are associated with or are a part of any terrorist groups or organizations. A bank is obligated to not open an account for a customer in case they are unable to verify the information provided by them or if the complete documents have not been submitted.
2. Customer Identification Procedure
This norm or obligation involves carrying out a procedure which would verify the identity of the customer who wishes to open an account in a bank or any other financial institution with the help of legal documents which prove the client’s identity. A risk based approach should be adopted so that a thorough check can be carried out so that the bank can assure itself that the client does not have a criminal background. The customers/clients which fall under the category of legal persons, a bank has to verify their status as per the laws through the documents provided to it. Secondly, the individual acting on the behalf of the aforementioned legal person, also has to be verified.
The responsibility of framing and establishing a system to regularly update the personal information provided by the customers along with their photographs, lies upon the bank. It a a necessary and an important obligation. For clients who are categorized as low risk, the information should be updated at least once in every five years and as for clients who are categorized as either medium risk or high risk, their information has to be updated at least once in every two years.
3. Monitoring of Transactions
It would not be wrong to say that the monitoring procedure is one of the most important norms of the KYC policy. All the banks and other financial institutions are bound to keep a track of the transaction activity of all of their clients and customers. To fulfill this, it is necessary that the bank is aware of what an unusual transaction entails. The accounts of the customers which the bank has recognized as medium or high risk have to be paid special attention. All the transactions which are unusual in nature and involve high financial amounts should be monitored. Moreover, if the bank finds large amounts of cash in an account which is highly inconsistent with the client’s routine activity, then it should be tracked. The banks should also monitor sudden change in the transaction of cash in the bank accounts of customer which do not represent any rational or legal purpose.
4. Risk Management
The sole responsibility of establishing procedures for tracking the risk factor of the clients/customers lies upon the banks. It is upon the top bank management to ensure that their bank’s KYC policy is running effectively without any issues. Banks should also make sure that there is an adequate implementation of anti money laundering measures to make sure that the bank is not being used for illegal activities. The banks possess an internal audit system along with a compliance function system which are tasked with ensuring the adequate implementation of the bank’s KYC policies. The banks should also regularly evaluate their own policies and ensure that their audit systems and compliance function systems have the appropriate number of recruited staff who possess the required knowledge for managing hefty tasks.
In addition to the above mentioned obligations, the banks should also devise a security mechanism to expeditiously identify the accounts which might have possible terrorist links. The speedy identification would let the bank report such suspicious transactions to the Financial Intelligence Unit of India.
- Master Circulars – Reserve Bank of India: https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8179
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