Executive Summary

The projects highly depend on the banking as career through the project try to give all the
basic and advance idea about Know your customer. The target this project is not only to get
information but to have an overview of the changes that have taken place in banks over the
last few decades because of the improvement in technology. The project speaks about that
various formalities, Rules and regulations of Indin banks. The project tries to highlight the
awareness of the customer in respect to various deposits and loan products offered by Indian
bank.

Today the bank are becoming more technology oriented rather than work force oriented .
New policies coming in day in day out. Bank today are providing various Facilities to the
best of their ability and in this way had benefited to the common man. The ‘Know Your
Customer’ policy, commonly referred to as ‘KYC’, is a mandatory framework for all banks
and other financial institutions and which sees to it that the identity of individuals or entities
resorting to financial services is ascertained at all times. KYC is what helps ensure that
individuals or criminal organisations are not using banks as intermediaries for identity theft,
fraud, money laundering, financing of terrorism and other illegal activities.

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 Introduction

➢ HISTORY

Worldwide Impact:

The main purpose of KYC norms was to restrict money launderingand terrorist financing
when it was introduced in late the 1990s in the United States. The US government turned
very strict after 9/11 and all regulations were finalized before 2002 for KYC. The US has
made changes in its major legislations -- Bank Secrecy Act, USA Patriot Act -- to make KYC
norms really effective for the banking sector. Taking a leaf out of the US book, the Reserve
Bank of India too directed all banks to implement KYC guidelines for all new accounts in the
2nd half of 2002.For existing accounts, imposing KYC norms was a little difficult, so the RBI
issued guidelines for the same at the end of 2004.
KYC is the due diligence and bank regulation that financial institutions and other regulated
companies must perform to identify their clients and ascertain relevant information pertinent
to doing financial business with them. Know your customer policies have becoming
increasingly important globally to prevent identity theft fraud, money laundering and terrorist
financing. In a simple form these rules may equate to answering twelve questions, but this is
the tip of the iceberg and regulators now expect much more. KYC should not be thought of as
a form to be filled - it is a process to be undergone from the start of a customer relationship to
the end. One aspect of KYC checking is to verify that the customer is not on any list of
known fraudsters, terrorists or money launderers, such as the Office of Foreign Assets
Control's Specially Designated Nationals list. Beyond name matching, a key aspect of KYC
controls is to monitor transactions of a customer against their recorded profile, history on the
customer’s accounts and with peers. Know Your Customer processes are also employed by
regular companies of all sizes, for the purpose of ensuring their proposed agents', consultants'
or distributors' anti- bribery compliance. Banks, insurers and export credit agencies are
increasingly demanding that customers provide detailed anti-corruption due diligence
information, to verify their probity and integrity.

➢ Background:

The Reserve Bank of India (RBI) had issued a directive that banks should draw up a time
bound action plan for obtaining customer identification documents under new KYC norms in
respect of all the old accounts and complete the entire exercise by 31.12.2004. Accordingly,

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the Zones/Branches had been advised to comply with the RBI directive as per the action plan.
All the Zones had confirmed compliance of the KYC norms for all the accounts based on
branch confirmations and the final certificate was furnished by the Bank to the RBI in April,
2005

➢ RBI Follow-up:

We have, thereafter, been time and again reiterating the importance of extremely careful com
pliance of KYC guidelines.
In spite of these instructions and compliance certificates, instances of non-
compliance of KYC norms have been pointed out by the RBIAuditors and Internal/concurrent
Auditors.
At every quarterly meeting, the RBI has been expressing seriousconcern over the continue ins
tances of non-compliance of KYCguidelines.
They had categorically advised that the Bank should adopt zerotolerance policy in respect of
deviation from adherence to KYC normsin all accounts including existing accounts and confi
rm compliance tothem.

➢ KYC Compliance Measures:

The primary objective of KYC guidelines is to prevent banks frombeing used by criminal ele
ments for money laundering and terroristactivities and avert occurrence of frauds.
KYC procedures also enable banks to understand their customersand their financial dealings
better and thereby facilitatingprudential management of risks.
Following are measure for achieving full KYC compliance in allthe existing accounts as per
the RBI directives:
▪ Public Notice in News Papers:
RBI then punbish a general notice in newspaper in English and Hindi at the national level
inviting the customers attention to the need to urgently comly the KCY requirements.in order
to ensure that all the territories are covered , RBI also arrange to publish the notice in the
public newspaper of different states.
▪ Identification of KYC Non-compliant Accounts:
The task of identifying the accounts requiring KYC compliance at each branch office shall be
carried out by the Zones on priority. In the order to ensure that the exercise is done diligently,
the scrutiny of accounts to identify the KYC non-complaint accounts at a Branch shall be
done by the officers/deputed from a different Branch.

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Concept of Know Your Customer (KYC):

KYC conformity increasingly entails the creation of auditable evidence of due diligence
activities, in addition to the need for customer identification. Mulleretal. (2007)indicate that
in order to meet KYC conformity requirements, financial institutions must validate that
customers are not or have not been involved in illegal activities such as fraud, money
laundering or organized crime, verify a prospective client’s identity, maintain confirmation
of the steps taken to identify their identity and determine whether a prospective customer is
listed on any certified lists in connection with supposed terrorist activities, money laundering,
fraud or other crimes.They further assert that an organization needs to know the source of
funds in a customer’s accounts.He further states that the use of financial institutions for
money laundering not only jeopardizes their soundness and stability but also the confidence
in the financial system as a whole. Being custodians of public funds, all commercial banks in
Kenya regularly undergo a statutory inspection exercise by the CBK as the regulator, in order
to determine how well the business is being run and more so to establish the level of KYC
compliance and their effectiveness within the institution. The inspection exercise is centered
along the various risk frameworks to determine how best the banks mitigate against them.
Much of the banking industry’s counter measures will stem from a solid KYC procedure with
a tiered monitoring system of certain accounts wherein “red flags” for any un-usual behavior
are set and these risks will vary along bank-product lines.

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These principles as laid down have been widely accepted and adopted by jurisdictions
throughout the world as a benchmark for commercial banks and a good practice guideline for
all other categories of financial institutions. The collapse of several Kenyan banks in the 1980
– 1990s gave credence to the fact that an ineffective regulator possibly due to political and
other forces interference played an even bigger role in the performance of the industry.

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KYC?

We will begin by making sure we have a common understanding of the Definition of ‘know
your customer’ (KYC) policy and the objectives of implementing this type of policy.
It is critical for financial institutions, professionals working within the financial sector,
bullion and gambling sectors as well as other regulated entities to know their customers very
well. Financial institutions and other reporting entities should have a proper understanding of
their customers to satisfy their respective KYC obligations. It is equally important that
employees of these organisations are properly trained regarding the importance of KYC and
the specific KYC policies or procedures of their organisation. KYC is important for a number
of other reasons. For example, if a business knows itscustomers well, it may be able to
prevent damage to its reputation and avoid fraud or excessive risk in financial transactions
involving customers.
The ‘Know Your Customer’ policy, commonly referred to as‘KYC’, is a mandatory
framework for all banks and other financial institutions and which sees to it that the identity
of individuals or entities resorting to financial services is ascertained at all times. KYC is
what helps ensure that individuals or criminal organisations are not using banks as
intermediaries for identity theft, fraud, money laundering, financing of terrorism and other
illegal activities.
The KYC Policy is backed by laws and guidelines, namely:
The Banking Act 2004;
The Financial Intelligence and Anti-Money Laundering Act of 2002;
The Financial Intelligence and Anti-Money Laundering Regulations of 2003; and

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The Bank of Mauritius Guidance Notes on Anti-Money Laundering and Combating the
Financing of Terrorism
The information collected is kept confidential and will not be disclosed to any third party
except as provided by law, including under Section 64 of the Banking Act 2004.

Who is Customer?
For the purpose of KYC policy a “customer” 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 te account is maintained

(i.e. the beneficial owner);

▪ Beneficiaries of transactions conducted by professional

intermediaries, such as Stock Brokers, Chartered
Accountants, Solicitors etc as per mitted under
the law and

▪ Any person or entity connected with a financial

transaction which can pose significant reputational
or other risk of the bank, say a wire transfer or
issue of high value demand draft as a single transaction.

What KYC implies for banks?

KYC is an irrevocable legal requirement for banks and which aims at protecting customers
from impersonation and fraud and at mitigating reputational, operational and legal risks. As
per KYC requirements, banks must always hold up-to-date and confirmed information about
the identity, address, occupation, business and banking activities of all accountholders, clients
and prospective customers. The KYC verification exercise relies on requesting customers and
applicants to provide identification documents, data or information as and when deemed
necessary.

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Why KYC is important for customer?
Knowing the customer is key for any business endeavor. It enables the bank to know or
understand their customers and their financial dealings to be able to serve them better.
It is an essential component of what is required from you for opening an account at any bank,
including through electronic means it ensures that the relationship between You and your
bank is properly maintained as per legal provisions, thus protecting.You against theft identity
or unauthorised fraudulent transactions at all stages of this Relationship.
It is applicable, but not limited to, opening or holding an account, having a fixed deposit,
applying for a loan, renting a safe deposit box, entering into a fiduciary relationship or having
recourse to a bank for a one-off transaction. It enables you to flag any change pertaining to
your profile (residential address, employment details, change in account signatories, mandate
holders, beneficial owners, etc.

Consequences of not complying with KYC requirement.

a) To establish the identity of the client. This means identifying the customer and verifying
his/her identity by using reliable, independent source documents, data or information.
For individuals, Bank will obtain identification data to verify the identity of the customer, his
address/location and also his recent photograph. This will be done for the joint holders and
mandate holders, as well.
For non-individuals, Bank will obtain identification data to :
1) Verify the legal status of the legal person/entity
2) Verify identity of the authorized signatories and
3) verify identity of the Beneficial owners/controllers of the account.

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 b) To ensure that sufficient information is obtained on the nature of employment/business
that the customer does/expects to undertake and the purpose of the account.

Application of KYC
KYC will be carried out at the following stages:
• Opening a new account.
• Opening a subsequent account where documents
as per current KYC standards have not been
submitted
while opening the initial account.
• Opening a Locker facility where these documents
are not available with the bank for all the Locker
facility holders.
• When the bank feels it necessary to obtain additional information from existing customers
based on conduct of the account.
• When there are changes to signatories, mandate holders, beneficial owners etc. KYC will also
be carried out in respect of non-account holders approaching the bank for high value one-off
transactions.
• To change the branch , you need to submit an application at your current branch requesting to
change the home branch of your account to the branch identifies by you.

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 OBJECTIVE
The objective of KYC guidelines is to prevent the Company from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures also
enable the Company to know/understand their customers and their financial dealings better
which in turn help them manage their risks prudently.
• To promote and develop in India sound and progressive banking principles, practices and
conventions and to contribute to the developments of creative banking.
• To render assistance and to provide various common services to Members and to the banking
industry.
• To develop and implement new ideas and innovations in banking services, operations and
procedures.
• To organize co-ordination and co-operation on procedural, legal, technical, administrative or
professional problems and practices of banks and the banking industry To initiate advance
planning for introduction of new systems or services in the banking industry.
• To collect, classify and circulate statistical and other information on the structure and
working of the banking system.
• To act as a clearing house for dissemination and exchange of statistical data, information,
views and opinions on the systems, procedures and practices, and organization and methods
of banks and on the structure, working and operations of the banking system.
• To explore, plan, co-ordinate and organize detailed surveys on banking, business, resources,
personnel and management development programmers of banks and the banking industry.
• To pool together talents and resources available with members and to organize exchange of
expertise and experiences of members for simplifying forms and procedures, for reducing
cost of operations, for increasing efficiency and productivity and for such other common
purposes as may be necessary or relevant to banks and the banking industry.
• To organize exchange of credit information and opinions, export information or information
and views on any other aspects of interest to banks or the banking industry.
• To promote education and knowledge of the law and practice of banking.
• To issue periodical newsletters, bulletins or magazines and publish books, pamphlets or other
literature on matters of interest to members and to the banking industry.
• To project a good public image of banking as a service industry and develop good public
relations.

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• To promote harmonious personnel relations in banking industry and to devise ways and
means for involving banking personnel in the endeavors of banks for growth and
development of banking and the economy of the country.
• To organize, promote and afford facilities for indoor and outdoor games, any form of sports,
recreation, sports competitions, events, cultural activities, social activities, fine arts, social
meetings, entertainments and to organize meetings for the above purposes and to provide for
purposes by purchasing, acquiring, taking on lease, own, hire or otherwise playing fields,
grounds, buildings, pavilions and other facilities.
• To give financial assistance to individuals or bodies, from out of its own funds, or by
collection from its members, or from any other source, and for the purpose of such collection,
to accept grants, donations, etc. in cash or kind from Government, its members, other
organizations, members of the public, etc. and to collect subscriptions, membership and other
fees and to levy fees or charges for the use of the facilities and to raise funds in any manner to
strengthen the financial position of the Association, from time to time, for the purpose of
providing education, training and facilities for imparting basic, advance knowledge and
techniques in games, sports, cultural activities, social activities, fine arts, etc. and to give
donations, technical and other assistance, sports equipments, sports facilities and expert
guidance to organizers for this purpose whether its members or not and to conduct, organize,
participate or to associate itself in State-Level, Nation, International Tournaments and
competitions pertaining to sports, cultural activities, social activities, fine arts, etc., held in or
outside India.
• To found, establish, develop and finance a separate body for the promotion of objects
contained in Clauses and generally, and to register it as a Society and/or Public Trust, or a
Company under the provisions or relevant Acts, as the case may be.
• To maintain continuous communications with the representatives of bank employees, to
conduct talks, discussions, and negotiations with them and to arrive at Settlements.
• To provide assistance and guidance to members in interpretation and implementation of
Awards, Settlements, etc.
• To assist, advise and guide all members and the smaller members in particular on all their
needs, difficulties and problems of growth, development and working.
• To act as an agent or a representative of a member or members in respect of matters
connected with any of their operations working or administration.

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• To maintain close co-ordination and liaison with Reserve Bank of India, All Financial
Institutions, Chambers of Commerce, Organizations of Banking Industry, Management or
Educational Institutes, Universities and such other Organizations for realizing the subject and
purposes of the Association.
• Generally to do all and any other thing that may be necessary or relevant for the realization
of the objects and purposes of the Association directly or indirectly.
• To carry on publicity for the purpose of educating public opinion with regard to the scope,
importance and activities of the banking industry, for creative growth and development.
• To do all and such other things as are incidental or conductive to the attainment of any or all
of the above objects.
• To lay down policy framework for abiding by the Know Your Customer Norms and Anti
Money Laundering Measure as set out by Reserve Bank of India, based on the
recommendations of the Financial Action Task Force (FATF) and the paper issued on
Customer Due Diligence (CDD) for banks issued by the Basel Committee on Banking
Supervision.
• To prevent the Bank from being used, intentionally or unintentionally, by criminal elements
for money laundering or terrorist financing activities.
• To enable the Bank to know / understand its customers and their financial dealings better,
which in turn would help it to manage its risks prudently.
• To put in place appropriate controls for detection and reporting of suspicious activities in
accordance with applicable laws / laid down procedures and regulatory guidelines.
• To take necessary steps to ensure that the relevant staff are adequately trained in KYC/AML
procedures.
• Know Your Customer” (KYC) procedure is to be the key principle for identification of
an individual / corporate opening an account. The customer identification should entail
verification through an introductory reference from an existing account holder / a
person known to the bank or on the basis of documents provided by the customer.
• The Board of Directors of the banks are to have in place adequate policies that
Establish procedures to verify the Bonafide identification of the individual / corporate
opening an account Policies to establish processes and procedures to monitor.

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 Know Your Customer (KYC) Guidelines by Reserve Bank of India,
the Reserve Bank of India has been issuing guidelines on KYC
regularly. Some of the more important instructions are mentioned
below. It was instructed:

• In August 1976 that applicants for demand drafts, travelers cheques and money
transfers Should affix their Permanent Account Number (PAN) on the application for
transactions of Rs. 10,000 and above.
• In November 1987 it was stated that cash should not be accepted for retirement of
import bills. It was also stated that there must be a reasonable time (say 6 months)
between the time an introducer opens his account and introduces a prospective account
holder. Introduction of an account should enable the proper identification of the person
opening the account so that the person can be traced if the account is misused.
• In April 1991, banks were instructed that travelers cheques, demand drafts, mail
transfers and telegraphic transfers for Rs. 50,000 and above should be by debit to the
customer’s account or against cheques only and not against cash.
• In August 1992 banks were advised to adhere to the prescribed norms and safeguards
while opening accounts.
• In December 1992 banks were asked to ensure that when customers withdrew amounts
from their cash credit/ overdraft accounts that funds were not diverted for the
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 acquisition of fixed assets, investments in associate companies and acquisition of shares
and other capital market investments.
• In September 1993, banks were asked to be vigilant and ensure proper end use of bank
funds. They were to keep vigil over heavy cash withdrawals by account holders that
may be disproportionate to their normal trade/ business requirements. They were also
asked to question unusual trends.
• In November 1993 on account of fraudulent encashment of interest/ dividend warrants
banks were asked to not open accounts without proper introduction.
• In December 1993 banks were asked to seek customer identification while opening
accounts including the obtaining of photographs of customers.
• In April 1994 the RBI clarified that photographs must be obtained for both residents
and non- residents and for those authorized to operate accounts.
• In September 1994 on account of fraudulent operations in deposit accounts, banks were
asked to examine every request for opening joint accounts very carefully. “Generally
crossed cheques” and payable to “order” were to be collected only on proper
endorsement. Banks were also asked to exercise care in the collection of cheques of
large amounts and ensure that joint accounts are not used for “benami” transactions.
• In May 1995 banks were asked to introduce a system of close watch of new deposit
accounts and monitor cash withdrawals and deposits for Rs. 10lakhs and above in
deposit, cash credit and overdraft accounts.
• In September 1995 banks were asked to report to the RBI all transactions of Rs.10lakhs
and above.
• In December 2001, banks were asked to keep a watchful eye on transactions that may
be by terrorist organizations.
• In April 2002 banks were instructed to freeze accounts of individuals and entities
identified by the Security Council Sanctions Committee of the United Nations.
• In May 2002, Banks were asked to ensure no new accounts were opened by banned
organizations.
• In August 2002, the Reserve Bank reinforced its instructions stating:
• The key principle of the “know your customer” procedure should be the identification
of an individual/ corporate opening an account. This should entail an introductory
reference from an existing account holder/ person known to the bank.

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• The board of directors must have in place adequate procedures to verify the bona fide
identification of individuals. There should also be processes to monitor transactions of a
suspicious nature.
• This instruction raised the requirement of giving PAN to transactions of Rs. 50,000 or
more(earlier it was Rs. 10,000 – August 1976).
• There must be good control systems plus audits and checks to ensure the bank adheres
to its KYC policies.
• There should be a system at branch level to ensure that lists of terrorist entities are
circulated so that accounts/ transactions are not opened/consummated.
• Transactions of a suspicious nature must be reported to the appropriate authorities.
• It should be ensured that all the laws are adhered to.
• In May 2004, it was stated that information collected from the customer for KYC
purposes should not be used for cross selling.
• In recent years on account of the proliferation of banks and their opening branches in
locations that they had no branches before, it has been difficult to adhere strictly to
KYC guidelines. In these instances, introductions by prominent citizens and individuals
known to the bank are considered acceptable.
• The concern is usually with respect to accounts introduced by outsiders retained for this
purpose who are remunerated on the basis of the number of accounts they introduce.
The consensus in these days of intensive competition is that this is an acceptable risk if
proper documentation to verify the antecedents of the person is taken.
• In November 2004, the RBI issued comprehensive guidelines. These reiterated that the
objective of Know Your Customer (KYC) guidelines is to prevent banks from being
used, intentionally or unintentionally, by criminal elements for money laundering
activities or for the financing of terrorism. KYC procedures also enable banks to know /
understand their customers and their financial dealings better which in turn help them
manage their risks prudently. The guidelines are applicable to foreign currency
accounts / transactions and to all new accounts.

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KYC Policy Guidelines
There are four key elements to the KYC guidelines as set out by RBI.

1. Customer Acceptance Policy (CAP)

There must be a clear customer acceptance policy that lays down explicit criteria for
acceptance of customers. The Customer Acceptance Policy must ensure that explicit
guidelines are in place on the following aspects of customer relationship in the bank. No
account is opened in anonymous or fictitious/ benami name(s);Parameters of risk perception

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are clearly defined in terms of the nature of business activity, location of customer and his
clients, mode of payments, volume of turnover, social and financial status etc. to enable
categorization of customers into low, medium and high risk (banks may choose any suitable
nomenclature viz. level I, level II and level III); customers requiring very high level of
monitoring, e.g. Politically Exposed Persons (PEPs) may, if considered necessary, be
categorized even higher; Documentation requirements and other information to be collected
in respect of different categories of customers depending on perceived risk and keeping in
mind the requirements of the Prevention of Money Laundering (PML) Act, 2002 and
guidelines issued by Reserve Bank from time to time; Accounts should not be opened nor
should an existing account be closed where the bank is unable to apply appropriate customer
due diligence measures i.e. bank is unable to verify the identity and / or obtain documents
required as per the risk categorization due to non cooperation of the customer or non
reliability of the data / information furnished to the bank. It may, however, be necessary to
have suitable built in safeguards to avoid harassment of the customer. For example, decision
to close an account may be taken at a reasonably high level after giving due notice to the
customer explaining the reasons for such a decision; Circumstances, in which a customer is
permitted to act on behalf of another person / entity, should be clearly spelt out in conformity
with the established law and practice of banking as there could be occasions when an account
is operated by a mandate holder or where an account may be opened by an intermediary in a
fiduciary capacity; There must be checks before opening a new account so as to ensure that
the identity of the customer does not match with any person with known criminal background
or with banned entities such as individual terrorists or terrorist organizations etc. Banks
should prepare a profile for each new customer based on risk categorization. The customer
profile must contain information relating to the customer’s identity, social / financial status,
nature of business activity, information about his clients’ business and their location etc. The
nature and extent of due diligence will depend on the risk perceived by the bank. However,
while preparing customer profile banks should take care to seek only such information from
the customer, which is relevant to the risk category and is not intrusive. The information
provided by the customer for KYC compliance while opening an account is confidential and
divulging any details thereof for cross selling or any other purpose would be in breach of
customer confidentiality obligations. Any other information from the customer should be
sought separately with his/ her consent and after opening the account. Banks are to strictly
ensure compliance with their obligations to the customer in this regard. For the purpose of

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risk categorizations, individuals (other than high net worth) and entities whose identities and
sources of wealth can be easily identified and transactions in whose accounts by and large
conform to the known profile may be categorized as low risk. Illustrative examples of low
risk customers could be salaried employees whose salary structures are well defined, people
belonging to lower economic strata of the society whose accounts show small balances and
low turnover, Government departments & Government owned companies, regulators and
statutory bodies etc. In such cases, the policy may require that only the basic requirements of
verifying the identity and location of the customer be met. Customers that are likely to pose a
higher than average risk to the bank may be categorized as medium or high risk depending on
customers background, nature and location of activity, country of origin, sources of funds and
his client profile etc. Banks may apply enhanced due diligence measures based on the risk
assessment, thereby requiring intensive ‘due diligence’ for higher risk customers, especially
those for whom the sources of funds are not clear. Examples of customers requiring higher
due diligence may include
(a) Non-resident customers,
(b) High net worth individuals,
(c) Trusts, charities, NGOs and organizations receiving donations,
(d) Companies having close family shareholding or beneficial ownership,
(e) firms with sleeping partners,
(f) politically exposed persons (PEPs) of foreign origin,
(g) Non-face to face customers, and
(h) Those with dubious reputation as per public information available, etc.
It is important to bear in mind that the adoption of customer acceptance policy and its
implementation should not become too restrictive band must not result in denial of banking
service to general public, especially to those, who are financially or socially disadvantaged.

Customer Identification Procedure (CIP)

The policy approved by the board of banks should clearly spell out the Customer
Identification Procedure to be carried out at different stages i.e. while establishing a banking
relationship; carrying out a financial transaction or when the bank has a doubt about the
authenticity / veracity or the adequacy of the previously obtained customer identification
data. Customer identification means identifying the customer and verifying his/ her identity
by using reliable, independent source documents, data or information. Banks need to obtain

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 sufficient information necessary to establish, to their satisfaction, the identity of each new
customer, whether regular or occasional, and the purpose of the intended nature of banking
relationship. Being satisfied means that the bank must be able to satisfy the competent
authorities that due diligence was observed based on the risk profile of the customer in
compliance with the extant guidelines in place. Such risk-based approach is considered
necessary to avoid disproportionate cost to banks and a burdensome regime for the
customers. Besides risk perception, the nature of information / documents required would
also depend on the type of customer (individual, corporate etc.).
• For customers that are natural persons, the banks should obtain sufficient identification data
to verify the identity of the customer, his address / location, and also his recent photograph.
• For customers that are legal persons or entities, the bank should: Verify the legal status of the
legal person/ entity through proper and relevant documents; Verify that any person purporting
to act on behalf of the legal person / entity is so authorized and identify and verify the identity
of that person; Understand the ownership and control structure of the customer and determine
who are the natural persons who ultimately control the legal person.
• Banks may frame their own internal guidelines based on their experience of dealing with such
persons/entities, normal bankers’ prudence and the legal requirements as per established
practices.
• It should be noted that wherever banks desire to collect any information about the customer
for a purpose other than KYC requirements, it should not form part of the account opening
form. Such information may be collected separately, purely on a voluntary basis, after
explaining the objectives to the customer and taking his express approval for the specific uses
to which such information could be put.
• There must be Know Your Customer procedures for existing customers.
• Banks are expected to have adopted due diligence and appropriate KYC norms at the time of
opening of accounts in respect of existing customers. However, in case of any omission, the
requisite KYC procedures for customer identification should be completed at the earliest.
Additionally, banks must, on the basis of materiality, apply the KYC guidelines to all existing
accounts.
• Transactions in existing accounts should be continuously monitored and any unusual pattern
in the operation of the account should trigger a review of the customer confidential
documentation measures. Banks could apply monetary limits to such accounts based on the
nature and type of the account. It may however be ensured that all existing accounts of

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 companies, firms, trusts, charities, religious organizations and other institutions are subjected
to minimum KYC standards which would establish the identity of the natural/ legal person
and those of the “beneficial owners.” Banks should also ensure that term/ recurring deposit
accounts or accounts of similar nature are treated as new accounts at the time of renewal and
subjected to revised KYC procedures.
• Where the bank is unable to apply appropriate KYC measures due to non-furnishing of
information and or/ non-cooperation by the customer, the bank should close the account or
terminate the relationship after issuing due notice to the customer explaining the reasons for
taking such a decision. Such decisions need to be taken at a reasonably senior level.
• To ensure that existing small account holders are not inconvenienced and the KYC procedure
is completed in time, banks may limit the application of KYC procedures to existing accounts
where the credit or debit summation for the financial year ended March 31, 2003 is more than
Rs.10lakh or where unusual transactions are suspected.
• KYC procedures must applied to all existing accounts of trusts, companies/firms, religious
charitable organizations and other institutions or where the accounts are opened through a
mandate or power of attorney.

Monitoring of Transactions
• Ongoing monitoring is an essential element of effective KYC procedures. Banks can
effectively control and reduce their risk only if they have an understanding of the normal and
reasonable activity of the customer so that they have the means of identifying transactions
that fall outside the regular pattern of activity. However, the extent of monitoring will depend
on the risk sensitivity of the account.
• Banks should pay special attention to al complex, unusually large transactions and all unusual
patterns, which have no apparent economic or visible lawful purpose. The bank may
prescribe threshold limits for a particular category of accounts and pay particular attention to
the transactions which exceed these limits.
• Transactions that involve large amounts of cash inconsistent with the normal and expected
activity of the customer should particularly attract the attention of the bank.
• Very high account turnover inconsistent with the size of the balance maintained may indicate
that funds are being washed through the account. High-risk accounts have to be subjected to
intensify monitoring.

20
• Every bank should set key indicators for such accounts, taking note of the background of the
customer, such as the country of origin, sources of funds, the type of transactions involved
and other risk factors. Banks should put in place a system of periodical review of risk
categorization of accounts and the need for applying enhanced due diligence measures.
• Banks should ensure that a record of transactions in the accounts is preserved and maintained
as required in terms of section 12 of the PML Act, 2002. It may also be ensured that
transactions of a suspicious nature and / or any other type of transaction notified under
section 12 of the PML Act, 2002, is reported to the appropriate law enforcement authority.
• Banks should ensure that its branches: Continue to maintain proper record of all cash
transactions (deposits and withdrawals) of Rs.10 laky and above. Have an internal monitoring
system that has an inbuilt procedure for reporting of large cash transactions and those of a
suspicious nature to controlling/ head office on a fortnightly basis. Early computerization of
branch reporting will facilitate prompt generation of such reports. Report transactions of a
suspicious nature to the appropriate law enforcement authorities designated under the
relevant laws governing such activities have well laid down systems for freezing of
suspicious accounts. There must be quarterly reporting of suspicious accounts to the audit
committee of the board o the board of directors.

Risk Management

• The Board of Directors of the bank should ensure that an effective KYC programmed is put
in place by establishing appropriate procedures and ensuring their effective implementation.
It should cover proper management oversight, systems and controls, segregation of duties,

21
 training and other related matters. Responsibility should be explicitly allocated within the
bank for ensuring that the bank’s policies and procedures are implemented effectively.
• Banks may, in consultation with their boards, devise procedures for creating Risk Profiles of
their existing and new customers and apply various Anti Money Laundering measures
keeping in view the risks involved in a transaction, account or banking/business relationship.
• Banks’ internal audit and compliance functions have an important role in evaluating and
ensuring adherence to the KYC policies and procedures. As a general rule, the compliance
function should provide an independent evaluation of the bank’s own policies and
procedures, including legal and regulatory requirements.
• Banks should ensure that their audit machinery is staffed adequately with individuals who are
well-versed in such policies and procedures. Concurrent/ Internal Auditors should
specifically check and verify the application of KYC procedures at the branches and
comment on the lapses observed in this regard. The compliance in this regard may be put up
before the Audit Committee of the Board on quarterly intervals.
• Banks must have an ongoing employee training programmed so that the members of the staff
are adequately trained in KYC procedures. Training requirements should have different
focuses for frontline staff, compliance staff and staff dealing with new customers. It is crucial
that all those concerned fully understand the rationale behind the KYC policies and
implement them consistently.

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 Impact of Know your customer

KYC program has benefits for both authority/banks/FIs as well as for customers too. What
are these benefits, have a look.

➢ Benefits of KYC for Authority.

Its main purpose and benefit is Anti Money Laundering. It enables to stop money laundering
through illegal activity or source it enables banks to understand their customers and their
financial activities it helps banks/FIs to manage their financial dealings with their customers.
It helps to check necessary requirements at the time of opening account or getting involved in
business dealing, and ensures the identity of a customer, whether they belongs from a
criminal background or banned entities such like terrorists or illegal organizations. It helps
banks/FIs in Monitoring of Transactions of their customers. And some other benefits too.

➢ Benefits of KYC for customer.

With the help of KYC compliance a customer can get these benefits. Good communication
between banks/FIs: Customers get directly benefited in terms of a good communication
relationship between their banks/FIs. Proper information on time: By this a customer gets
proper information's on time, and never lets any chance go. Good image in banks/FIs: By
fulfilling the KYC formality, a customer builds good image of himself in front of banks/FIs.
Apart from all these, there are many more other benefits to the customers and banks for being
a KYC compliance customer and authority.

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 What risks are mitigated by KYC?

Let's take a brief look at the risks that can be mitigated by an effective KYC policy. There are
five types of risks that an effective KYC policy can help to mitigate:
• Reputational
• Operational
• Legal
• Financial
• Concentration.

Reputational risk:
The reputation of a business is usually at the core of its success. The ability to attract good
employees, customers, funding and business is dependent on reputation. Even if a business is
otherwise doing all the right things, if customers are permitted to undertake illegal
transactions through that business, its reputation could be irreparably damaged. A strong
KYC policy helps to prevent a business from being used as a vehicle for illegal activities.

Operational risk:
This is the risk of direct or indirect loss from faulty or failed internal processes, management
and systems. In today's competitive environment, operational excellence is critical for
competitive advantage. If a KYC policy is faulty or poorly implemented, then operational
resources are wasted, there is an increased chance of being used by criminals for illegal
purposes, time and money is then spent on legal and investigative actions and the business
will be viewed as operationally unsound.

Legal risk:
If a business is used as a vehicle for illegal activity by customers, it faces the risk of fines,
penalties, and injunctions and even forced discontinuance of operations. Apart from
regulatory risk, involvement in illegal activities could lead to third-party judgments and
unenforceable contracts. In addition, professionals working within many financial and other
professional sectors may also personally be subject to legal action or prosecution.
Due to the nature of business, these risks can never entirely be eliminated. However, if a
business does not have an effective KYC policy, it will be inviting legal risk. By strictly
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implementing and following a KYC policy, a business can mitigate legal risk to itself and its
staff.

Financial risk:
If a business does not adequately identify and verify customers, it may run the risk of
unwittingly allowing a customer to pose as someone they are not. The consequences of this
may be far reaching. If a business does not know the true identity of its customers, it will also
be difficult to retrieve any money that the customer owes.

Concentration risk:
This type of risk occurs on the assets side of a business if there is too much exposure to one
customer or a group of related customers. It also occurs on the liabilities side if the business
holds large concentrations of funds from one customer or group (in which case it faces
liquidity risk if these funds are suddenly withdrawn).
By implementing an effective KYC policy, a business can identify the entire scope of the
asset and liability risk faced in relation to each customer and group of customers.

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 RISK CATEGORISATION OF CUSTOMERS

➢ High Risk Customers

1. Individuals and entities in various United Nations Security council Resolutions (UNSCRs)
such as UN 1267 etc.
2. Individuals or entities listed in the schedule to the order under section 51 A of the
Unlawful Activities (Prevention) Act, 1967 relating to the purposes of prevention of and for
coping with terrorist activities.
3. Individuals and entities in watch lists issued by Interpol and other similar international
organizations.
4. Customers with dubious reputation as per public information available or commercially
available watch lists.
5. Individuals and entities specifically identified by regulators, FIU and other competent
authorities as high-risk.
6. Customers conducting their business relationship or transaction in unusual circumstances,
such as significant and unexplained geographic distance between the institution and the
location of the customer, frequent and unexplained movement of accounts to different
institutions in various geographic locations etc.
7. Customers based in high risk countries/jurisdictions or locations.
8. Politically exposed persons (PEPs) of foreign origin, customers who are close relatives of
PEPs and accounts of which A PEP is the ultimate beneficial owner;
9. Non-resident customers and foreign nationals
10. Embassies/ Consulates
11. Off-shore (foreign) corporation/business

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12. Non face-to-face customers
13. High net worth individuals
14. Partnership Firms
15. Firms with ‘sleeping partners’
16. Walk-in-Customers
17. Companies having close family shareholding or beneficial ownership
18. Complex business ownership structures, which can make it easier to conceal underlying
beneficiaries, where there is no legitimate commercial rationale
19. Shell companies which have no physical presence in the country in which it is
incorporated. The existence simply of a local agent or low level staff does not constitute
physical presence.
20. Investment Management / Money Management Company/ Personal Investment Company
21. Accounts for “gatekeepers’ such as accountants, lawyers, or other professionals for their
clients where the identity of the underlying client is not disclosed to the financial institution.
22. Client Accounts managed by professional service providers such as law firms,
accountants, agents, brokers, fund managers, trustees, custodians, etc
23. Trusts, charities, NGO’s/NPOs (those operating on a “cross-border’ basis) unregulated
clubs and organizations receiving donations (excluding NPOs/NGOs promoted by United
Nations or its agencies)
24. Money service Business: including seller of: Orders/ Travelers Checks / Money
Transmission /Check Cashing / Dealing or Exchange
25. Business accepting third party cheque (except supermarkets or retail stores that accept
payroll cheque / cash payroll cheque)
26. Gambling/gaming including “junket Operators” arranging gambling tours
27. Dealers in high value or precious goods( e.g. jewel, gem and precious metals dealers, art
and antique dealers and auction houses, estate agents and real estate brokers).
28. Customers engaged in a business which is associated with higher levels of corruption
(e.g. arms manufacturers, dealers and intermediaries)
29. Customers engaged in industries that might relate to nuclear proliferation activities or
explosives.
30. Customers that may appear to be Multi level marketing companies etc.

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 ➢ Medium Risk Customers
1. Non Bank Financial Institution
2. Stock brokerage
3. Import/ Export
4. Gas Station
5. Car/ Boat/ Plane Dealership
6. Electronics (wholesale)
7. Travel agency
8. Used car sales
9. Telemarketers
10. Providers of telecommunications service, internet café, IDD call service,
Phone cards, phone center.
11. Dot-com company or internet business
12. Pawnshops
13. Auctioneers
14. Cash-intensive Businesses such as restaurants, retail shops, parking Garages, fast food
stores, movie theaters, etc.
15. Sole Practitioners or Law firms (small, little known)
16. Notaries (small, little known)
17. Secretarial (small, little known)
18. Accountants (small, little known)
19. Venture capital companies

➢ Low Risk Customers

1. Individuals (Other than included in High and Medium Risk categories above)
2. Government departments and Government owned Companies, regulatory and statutory
bodies
3. Non Profit Organisations / Non Government Organisations promoted by United Nations or
its agencies.
4. All other categories of accounts / customer not falling under the above indicated High and
Medium Risk classification

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 KYC NORMS CROSSING THE LIMITS?

Mumbai, July 17 Too much of anything is not good, or so the adage goes. This is true in the
case of banks enforcing Know Your Customer (KYC) norms. With the Reserve Bank of India
penalising several banks for violating KYC norms, most banks are now applying them with
zeal, even at the cost of losing customers sometimes. The mandatory details required under
KYC norms are proof of residence such as ration card, letter from employer or the housing
society and proof of identity, which could be any photo identity such as passport, voter ID
card, PAN card, and driving licence. But customers often face banks asking for other
personal details. Recently, a local Mumbai branch of Indian Overseas Bank asked customers
for information about their blood group, along with other details such as PAN number and
proof of residence, as part of KYC. But such personal details are optional and it is not
binding on the customer to provide them, said an official from the bank.

KYC norms deter rural clients:

Another reason is Know Your Client (KYC) norms where every account holder has to
disclose relevant detail like photo identity, address proof, PAN card above a certain amount,
etc. For rural people it is very difficult to provide these details as a number of them are not
literate especially not in English and documents are generally maintained in English.

29
 Literature Review

Know Your Customer (KYC)

Prof. Venkatesh U. Rajput
M.Com., MBA., NET, JRF, Chetan Business School, Institute of Management and Research,
Hubli
INTRODUCTION
Know Your Customer (KYC) is the due diligence and bank regulation that financial
institutions and other regulated companies must perform to identify their clients and ascertain
relevant information pertinent to doing financial business with them. In the USA, KYC is
typically a policy implemented to conform to a customer identification program mandated
under the Bank Secrecy Act and USA PATRIOT Act. Know your customer policies are
becoming increasingly important globally to prevent identity theft fraud, money laundering
and terrorist financing. Beyond name matching, a key aspect of KYC controls is to monitor
transactions of a customer against their recorded profile, history on the customer’s account(s)
and with peers.

II. KYC HAS DIFFERENT CONNOTATIONS AND THE DEFINITION ABOVE IS

FROM AN AML/CFT PERSPECTIVE
Know Your Customer processes are also employed by regular companies of all sizes, for the
purpose of ensuring their proposed agents', consultants' or distributors' anti-bribery
compliance. Banks, insurers and export credit agencies are increasingly demanding that
customers provide detailed anticorruption due diligence information, to verify their probity
and integrity. Some specialist consultancies help multinational companies and SMEs conduct
Know Your Customer processes when entering new markets. The consultative paper
'Consolidated know-your-customer (KYC) risk management' is a supplement to the Basel
Committee's 'Customer due diligence for banks' issued in October 2001. It examines the
critical elements for effective management of KYC policies and procedures in banks' foreign
branches and subsidiaries.

30
The adoption of effective know-your-customer (KYC) standards is an essential part of banks'
risk management practices. As discussed in the Customer due diligence for banks (CDD)
paper, banks with inadequate KYC standards may be subject to significant risks, especially
legal and reputational risk. Sound KYC policies and procedures not only contribute to a
bank's overall safety and soundness, they also protect the integrity of the banking system by
reducing the likelihood of banks becoming vehicles for money laundering, terrorist financing
and other unlawful activities.
The CDD paper outlines four essential elements necessary for a sound KYC programme.
These elements are
1. Customer acceptance policy
2. Customer identification
3. On-going monitoring of higher risk accounts
Jurisdictions should facilitate consolidated KYC risk management by providing an
appropriate legal A global risk management programme for KYC should incorporate
consistent identification and monitoring of customer accounts globally across business lines
and geographical locations, as well as oversight at the parent level, in order to capture
instances and patterns of unusual transactions that might otherwise go undetected. Such
comprehensive treatment of customer information can significantly contribute to a bank's
overall reputational, concentration, operational and legal risk management through the
detection of potentially harmful activities

III. KYC (KNOW YOUR CUSTOMER) INFORMATION FOR CUSTOMERS

INTENDING TO OPEN BANK ACCOUNT
The Reserve Bank of India (RBI) has advised banks to follow a 'KYC guidelines', wherein
certain personal information of the account-opening prospect or the customer is obtained. The
objective of doing so is to enable the Bank to have positive identification of its customers.
This is also in the interest of customers to safeguard their hard earned money. The KYC
guidelines of RBI mandate banks to collect three proofs from their customers. They are
1. Photograph
2. Proof of identity
3. Proof of address

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 IV. KNOW YOUR CUSTOMER – WHAT YOU MUST KNOW

1. igorous and robust

Generally this means consistent, thorough and accurate. The process must be documented
and available for inspection by regulators. The process must be SMART (Specific,
Measurable, Achievable, Relevant and Time bound), scalable and proportionate to the risk
and resources. A Ball workflow system ensuring that the KYC process and procedures are
Defined, v Repeatable and Measurable is recommended.

2. Reasonable assurance
What is reasonable depends upon factors including jurisdiction, risk and resources. For
sanction matches it depends upon information provided by regulators. In all cases the
suggested standard is to the civil standard of proof i.e. on the balance of probability.

3. Relevant adverse information

Information obtained from any source, including the Internet, free and subscription databases
and the media, which is directly or indirectly indicative of involvement in money laundering,
terrorist financing or predicate offenses.
Examples include fraud and other dishonesty, drugstores under sanction or countries with
which (institution) does not do business; to official sanctions or watch lists; and to
investigations flicking, smuggling or other proscribed offences, references to money
laundering, or conducting business, residing in or frequenting countries deemed by the
Financial Action Task Force and/or (institution) as being countries, convictions or
disciplinary findings by authorized regulatory bodies.

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 Conclusion

• KYC is the mandatory process for all the banks whether it is Private Bank or Govt.
Bank.
• Account opening procedure is more easy in Private banks in comparison of Govt.
Bank.
• In my study I Found that all banks provide KYC of all type of account and there is no
big difference between formalities.
• All banks follow rules and regulations according to RBI rules.
• In Nationalize banks they provide online Facilities for KYC, In co-operative Bank
mostly Bank are not Provided.
• In Rural Areas customer face difficulties to provide their Details Because Number of
them are illiterate.
• Banks doing KYC monitoring for anti-money laundering (AML) and checks relating
to combating the financing of terrorism (CFT) increasingly use specialized
transaction monitoring software, particularly names analysis software and trend
monitoring software.
• Know Your Customer processes are also employed by regular companies of all sizes,
for the purpose of ensuring their proposed agents', consultants' or distributors' anti-
bribery compliance. Banks, insurers and export credit agencies are increasingly
demanding that customers provide detailed anti-corruption due diligence information,
to verify their probity and integrity. Some specialist consultancies help multinational
companies and SMEs conduct Know Your Customer processes when entering new
market.
• The adoption of effective know-your-customer (KYC) standards is an essential part
of banks' risk management practices. As discussed in the Customer due diligence for
banks (CDD) paper, banks with inadequate KYC standards may be subject to
significant risks, especially legal and reputational risk. Sound KYC policies and
procedures not only contribute to a bank's overall safety and soundness, they also
protect the integrity of the banking system by reducing the likelihood of banks
becoming vehicles for money laundering, terrorist financing and other unlawful
activities.

33
• “A rigorous and robust process of investigation over and above (KYC) procedures,
that seeks with reasonable assurance to verify and validate the customer’s identity;
understand and test the customer’s profile, business and account activity; identify
relevant adverse information and risk assess the potential for money laundering and
/or terrorist financing to support actionable decisions to mitigate against financial,
regulatory and reputational risk and ensure regulatory compliance.”
• There is no escaping the paperwork while investing in financial products. Be it,
opening a new bank account, Demat account or buying insurance, filling the Know
Your Client (KYC) Documents is a mandatory procedure today.
• KYC (know Your Customer) do provide protection against Anti-Money Laundering
(AML) Measures/Combating of Financing of Terrorism (CFT).It helps banks and
financial institution by providing security measure to prevent future defaults.
• Negative part:
• In place of KYC it has become H2HYC (How to Harres Your Customer).Even with
all these the people who want to do all these things they get away with everything,
but only innocent people getting harassed by the banks with these policy. For simple
customers all these ruling are there. But for the big fish all these rules are getting by
passed that is there a son even after putting all these condition they are able to
manage the show. This is the reason for all malpractice going on all over the world
.IF POSSIBLE GOVERNMENT SHOULD LOOK SERIOUSLY.

34

Information to be obtained from customer for creating customer profile
The following information shall be obtained from the customer at the time of account
opening for profiling customers based on perceived risk.
Sr.no Customer Type
1 Individuals
2 Sole Proprietorship
3 Partnership
4 Companies
5 Trust, Association,
Society, Club (TASC)
Annexure – I
Information to be obtained from customer
• Profession – Salaried / Self-employed.
• Annual Income
• If self-employed, nature of profession /
business
• Annual turnover in case self-employed supported
by IT returns
• PAN number
• Name of sole proprietor
• Type of business
• Annual turnover supported by IT returns
• Name and address of clients (Supplier &
Purchaser)
• Name of partners
• Type of business
• Annual turnover supported by IT returns
• Name and address of clients (Supplier &
Purchaser)
• Name of directors
• Type of business
• Annual turnover supported by Annual Report
• Name and address of clients (Supplier &
Purchaser)
• Names and addresses of trustees
• Purpose of the TASC
• Last year’s total income supported by IT
35
 Returns

36
 Annexure – II

Features to be verified and documents that shall be obtained from

customers

Features Documents
Passport
Photo PAN card
Voter’s Identity Card
laminated Driving license - Permanent. For a Driving
Identity Proof license coming in a booklet form (Not laminated) to be
(Individual) acceptable as KYC document, an OSVdone by RCL
employee on the photocopy of the Driving license would be
mandatory.
Employee ID card (MNCs / PSUs /Public Limited
Companies/Other Government companies and not Pvt. Ltd.
Co)
Photo Ration Card
Photo Debit Card
Bankers’ verification/passbook with stamp on photograph
along with applicant’s signature. This can be accepted
provided it contains customer's photo and signature, a/c
number, date of opening, branch name, address and it shall
be certified only by the Branch Manager or Operations
Head with their name & designation.
Photo credit Card - provided the card is valid & current and
is at least 3 months old
Telephone Bill
Address Proof Life Insurance Premium receipt of any insurer ( Policy shall
(Individual) be minimum 12months in force)
Post paid Piped gas connection bill showing consumption and
full address
Electricity Bill

37
Ration Card
Voter’s Identity Card
Laminated Driving license - Permanent. For a Driving license
coming in a booklet form (Not laminated) to be acceptable as
KYC document.

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