KYC or ‘Know Your Customer’ is systematic mechanism devised by the Government to try and bring a halt to the financial crimes as well as the illegal practise of money laundering under the Prevention of Money Laundering Act of 2002. It entails a mandatory procedure for the proper verification of the client/customer’s identity and their background before they can access the services of the banks or other financial institutions. This is done to prevent the services of banks or other financial institutions from being exploited for funding of terrorism or any other illegal activities which are deemed illegal by law.
Every bank and financial institution is subjected to KYC norms and obligations and the KYC policies lay down the principle of ‘Reasonable Due Diligence’ which makes it essential for the financial institutions including banks to regularly update their client’s personal information and any other information which the bank deems necessary. The client’s cannot have access to any account: savings, current or demat in case they fail to comply with the KYC guidelines.
The procedure of Know Your Customer requires the maintenance and upkeep of a lot of records and information since the entire system is based upon the prior verification of identity of the client/customer through the officially valid documents that have been decided by the Reserve Bank of India.
The Prevention of Money Laundering Act of 2002 and all the rules that have been duly laid down under the act have to be necessarily followed by all the banks and the financial institutions and it is their responsibility to ensure that the KYC norms adopted by them are in compliance both with the provisions of PMLA as well as the guidelines of Reserve Bank of India as both the act as well as the RBI have subjected the banks and financial institutions to rules and obligations for the maintenance and preservation of records of KYC.
In compliance with Rule 3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, the banks are obliged to establish a system of maintenance of records for the below-mentioned:
- Any suspicious transactions, irrespective of whether they have been in cash or not.
- The cash transaction which have a value of more than ten lakh rupees or a cash transaction in foreign currency which is equivalent in value to ten lakh rupees.
- Any cash transaction which involves the use of forged or counterfeited currency notes.
- Any cash transaction which involves the use of receipts on the part of non-profit organizations which have a value of more than ten lakh rupees or the equivalent of ten lakh rupees in foreign currency.
- A series of transactions involving the use of cash, where these individual transactions have a value of less than ten lakh rupees or the equivalent of ten lakh rupees in terms of foreign currency, where all these transactions have been conducted within a single month and total sum of the series of transactions exceeds the amount of ten lakh rupees.
- Any transaction which has been reported in the Cash Transaction Report and has been submitted to the Financial Intelligence Unit of India.
Also, under Rule 3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, for each and every individual transaction that is conducted, the branches of all the banks as well as the financial institutions are required to keep a well-maintained record of :
- the nature of the transactions;
- the amount of the transaction and the currency in which it was denominated;
- the date on which the transaction was conducted; and
- the parties to the transaction.
The banks and the financial institutions should ensure that the record maintenance system that they have established lets all the data stored and recorded be retrieved and made available quickly whenever the concerned authorities require them.
The banks along with the financial institutions, which handle cash transactions have to carefully maintain the records of transaction for a time period of at least five years between the client/customer and the bank of the financial institution. The records should be stored for both national and international transactions so that in case the individual is found to be a part of any illegal criminal activity, then his individual transaction records can be reconstructed and be used an evidence to convict him.
According to Rule 10 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, all the documents which are submitted to the banks or the financial institutions by the customers/clients as a proof for their identification or as a proof for their address like copies of driving license, aadhar card, PAN card, passport, utility bills, etc., during the opening of an account or during the course of any business relationship, have to be necessarily maintained by the bank or the financial institution for a time period of at least five years after the account has been closed or the business relationship has been ended. This rule ensures that an individual suspected of a crime or any other illegal activity can be quickly identified. These documents relating to the identity and the address of the customers can be stored by the banks and financial institutions both in a soft copy or a hard copy format.
The banks and the financial institutions are necessitated by the regulations of the Reserve Bank of India to keep a close eye on transaction which involve a large amount of cash and seem suspicious, unusual and complex in nature and also where these transactions seem to serve no apparent economic or lawful use to anyone. Such transactions should be subjected to an adequate and a thorough examination both at the branch level and the Principal Officer level. The background of such transactions should be studied and proper attention should be paid to the documents and the memorandums relating to such transactions. All the information about such suspicious transactions have to be maintained in the form of records and such records have to be stored for a period of at least five years under Prevention of Money Laundering Act, 2002.
- Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating Financing of Terrorism (CFT)/Obligation of banks and financial institutions under PMLA, 2002: https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9848#C22
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