KNOW YOUR CUSTOMER (KYC)

The concept of KYC is to:

 Know the identity of the customer and his location

 Know his nature of activity

 Know his source of income, purpose of transaction

 Verification of his background (ie., whether he is known criminal or money launderer or in the
list of banned organisation or on the list of terrorist individuals/organsiaction)

 Monitor transactions against his recorded profile, history of account

KYC, therefore should not be thought of merely as collecting/obtaining ID/address proof document and
filling account opening form. It is not a responsibility, which ends with the opening of the account and
monitoring of transactions in the initial few months of opening the account, but it is a continuous
process to be undergone from the start of a customer relation to the very end.

KYC-AML-CFT GUIDELINES OF RBI

KYC-know your customer

AML-Anti Money Laundering

CFT – Combating of Financing of Terrorism

KYC principles issued by RBI in Aug 2002 under section 35(A) of BR Act 1949 with the objective to
prevent banks from, being used, intentionally or otherwise, by criminal elements for money laundering
activities. These guidelines are applicable to all accounts including foreign currency accounts.

KEY ELEMENTS OF KYC-AML-CFT POLICY

 Customer Acceptance Policy (CAP)

 Customer Identification Procedures (CIP)

 Monitoring of Transactions and

 Risk Management

Customer Acceptance Policy (CAP)

In this, bank lays down explicit criteria for acceptance of new/prospective customers:

 Not to open any account in anonymous or fictitious / benami name(s)

  To classify all new intending customers into various Money Laundering Risk categories viz., Low,
Medium or High risk at the time of the opening their accounts.
 Customers, based on the risk on the following 5 parameters to be to be classified:
-Location of customer (country of domicile)
- Nature of the business activity of the customer
- Product
- Annual Income /Turnover of the business
-Type of the customer.

The system of periodic review of risk categorization of accounts is to be done by banks at least onece in
six months for updation and risk re-classification in the following manner:

Type of Risk Profile Type of Review to be done Minimum Periodicity

Low Risk Only basic requirements of Ten Years
verifying the identity and
location of the customer are to
be met
Med.Risk To apply enhanced due diligence Eight years
measures as risk is higher than
average
High Risk Non-residents, HNIs, Trusts, Two years
NGOs, closely held companies,
politically exposed persons,
dubious persons

Guidelines to be followed under CAP

Branches to collect /obtain documents from the following suggestive list of Officially Valid
Documents(OVD).

- Passport
- Driving Licence
- Aadhar card
- PAN
- Voters ID
- NREGA Job Card

Customer Identification Procedure

This is an act of establishing who a person is. It means establishing beyond doubts

MONITORING OF TRANSACTIONS

Ongoing monitoring is an essential element of effective KYC Procedure. Branches can effectively control
and reduce its risk only if it has an understanding of the normal and reasonable activity of the customer
so that it has the means of identifying transactions that fall outside the regular pattern of the activity.
Branches has to pay special attention to all complex, unusually large transaction and all unusual
patterns which have no apparent economi or visible lawful purpose.

Various threshold limits for transactions in accounts of individuals and non-individuals are kept by banks
to generate alerts for detection of suspicious transactions and thereby monitoring transactions in the
accounts.

Transactions that involve large amounts of cash inconsistent with the normal and expected activity of
the customer to attract the attention of the branches in particular.

RISK MANAGEMENT

Bank is exposed to various risks viz.,

- Credit Risk
- Market Risk
- Operational Risk
- Reputation Risik
- Compliance Risk
- Concentration Risk
- Legal Risk etc

Banks are therefore required to undertake Risk Management by evaluating proper management
oversight, strengthening the systems and controls, segregation of duties, training and other related
matters.

COMBATING FINANCING OF TERRORISM (CFT)

In terms of PMLA Rules, suspicious transactions which give rise to a reasonable ground of suspicion that
these may involve financing of the activities relating to terrorism have to be reported to Financial
Intgelligence Unit India (FIU-IND).

As and when list of Terrorist Individuals and Entities approved by Security Council Committee
established pursuant to various United Nations Security Council Resolutions(UNSCRs) are received from
RBI, banks should circulate the same to all the branches for their information and updation purposes.

Freezing of Assets under Section 51 A. of Unlawful Activities(Prevention) Act 1967

As per the above, the Central Govt is empowered to freeze, seize or attach funds and other financial
assets or economic resources held by , on behalf of or at the direction of the individuals or entities Listed
in the Schedule to the order.

Bank branches will also file a Suspicious Transaction Report (STR) with FIU-IND covering all transactions
in the accounts covered by paragraphs above.
If an existing KYC compliant customer of a bank desires to open another account with the same Bank,
there shall be no need for a fresh Customer Due Diligence (CDD) exercise.

Electronic KYC (e-KYC)

e-KYC service is offered by Unique Identification Authority of India(UIDAI).

Banks to use e-KYC service, will have to get approval and authentication by UIDAI. Bio-metric scanning
devices approved by UIDAI to be used and the device has to be registered with them. The banks will
then need the Aadhar number and scan fingerprints of the customers through biometric readers.

KYC NON-COMPLIANCE

RBI has powers to impose fine under Sec.47(1)(b) of the BR Act 1949 for violation of KYC norms.

Partial freezing and closure of KYC Non-compliant Accounts

If unable to comply with the Customer Due Diligence requirements, they shall not open accounts,
commence business relations or perform transactions. In case of existing business relationship which is
not KYC compliant, banks shall ordinarily take steps to terminate the existing business relationship after
giving due notice.

Exception

Partial freezing shall be exercised after giving due notice of 3 months to the customers to comply with
KYC requirements. After this period, debits will be not be permitted with freedom to close the account.
After 6 months, all debits and credits in the account will be disallowed.

RECORD MANAGEMENT

Regarding the maintenance, preservation and reporting of customer account information, the provisions
of PML Act and Rules mandates that:

i) Maintain all necessary records of transactions between the Bank and the customer, both
domestic and international, for at least five years from the date of transaction.
ii) Preserve the records pertaining to the identification of the customers and their addresses
obtained for at least five years after the business relationship is ended.

SHARING KYC INFORMATION WITH CENTRAL REGISTRY/DATABASE

Central Repository of Information on Large Credit (CRILC) set up by RBI where FB+NFB exposure

of Rs.5 cr and more

Central Registry of Securitisation Asset Reconstruction and Security Interest of India(CERSAI)

Central Fraud Registry(CFR) set up RBI.

Issue and Payment of Demand Draft etc

Any remittance of funds by way of DD/NEFT/RTGS/IMPS or any other mode and issue of travellers
cheques for value of rupees fifty thousand and above shall be effected by debit to the customers
account or against cheques and not against cash payment.

MONITORING OF CASH TRANSACTIONS AND SUSPICIOUS TRANSACTIONS

PMLA 2002 stipulates certain obligations on the part of Banks for reporting the following:

Accordingly, Banks are required to make the following reports to the FIU-IND

 Cash Transaction Reporting(CTR)

 Counterfeit Currency Reporting(CCR)

 Suspicious Transaction Reporting (STR)

Cash Transaction Reporting (CTR):

i) All cash transactions of the value of more than Rs.10.00 lakhs or its equivalent in foreign
currency.

ii) Aggregate of transactions for Rs.10.00 lakhs in a month also to be reported

Counterfeit Currency Reporting (CCR)

All such reports to be filed not later than 7 working days from the day of occurrence of such
transactions. Banks centrally should collect the data and submit to FIU-IND

Suspicious Transaction Reporting (STR)

Frequent deposit/withdrawal or transfer of money not proportionate to their means/business,

purchasing or selling of foreign currencies in substantial amounts etc., which gives a suspicion have to be
reported under STR within 7 days from date of such activity.