Know Your Customer (KYC) Norms and Guidelines

Know Your Customer (KYC) norms and Guidelines

Company Registration in Coimbatore — Know Your Customer (KYC) norms and Guidelines what we are going to discuss here.

Know your customer standards

The object of KYC guidelines is to protect banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks should frame their KYC policies incorporating the following four key elements:

  • Customer Acceptance policy;
  • Customer identification Procedures;
  • Monitoring of transactions; and
  • Risk Management.

For the purpose of KYC Policy, a ‘customer’ may be defined as:

  • A person or entity that maintains as account and / or has a business relationship with the bank;
  • One on whose behalf the account I maintained (i.e., the beneficial owner);
  • Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc., as permitted under the law, and
  • Any person or entity or company connected with financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Customer Acceptance Policy (CAP)

Banks should develop a clear Customer Acceptance Policy laying 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 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. Customers requiring very high level of monitoring, e.g., Politically Exposed Persons (PEPs — as explained in Annex 2) 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 requirement sof PML Act, 2002 and guidelines issued by Reserve Bank from time to time;
  • Not to open an account or close an existing account 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 date or information furnished to the bank. It may, however, be necessary to have suitable build 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 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 the fiduciary capacity and
  • Necessary 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 may prepare a profile for each new customer based on risk categorization. The customer profile may contain information relating to 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 customer profile will be a confidential document and details contained therein shall not be divulged for cross selling or any other purposes.

For the purpose of risk categorization, 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 and 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 are to 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 customer’s 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’ of higher risk customers, especially those for whom the sources of funds are not clear. It is important to bear in mind that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services 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 or her identity by using reliable, independent source documents, data or information. Banks are need obtain 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 due to 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 or documents required would also depend on the type of customer (individual, corporate etc). For customers that are natural persons, the banks should obtain certain identification data to verify the identity of the customer, his address or 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 or entity through proper and relevant documents and verify that any person purporting to act on behalf of the legal person or entity is so authorized and identify and verify the identity of that person and understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person. Customer Identification requirements in respect of a few typical cases, especially, legal person requiring an extra element of caution are given in Annexure 2 for guidance of banks.

Monitoring of transactions

Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only is 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 all 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 transactions which exceed those limits. Transaction 
 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 intensified monitoring. Every bank should set key indicators for such accounts. , taking not 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 account is preserved and maintained as required in terms of section 12 of the PML Act, 2002. It may also be endure those transactions of 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 endure that its branches continue to maintain proper record of all cash transactions (deposits and withdrawals) of Rs. 10 lakh and above. The internal monitoring system should have an inbuilt procedure for reporting of such transactions and those of suspicious nature to controlling or head office on a fortnightly basis.

Risk Management

The Board of Directors of the bank should ensure that an effective KYC program 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, 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 and 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 or business relationship.

Banks internal audit and compliance functions have an important role 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 or 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 program so that the members of the staff are adequately trained in KYC procedures. Training requirements should have different focuses for front line 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.

Customer Education

Implementation of KYC procedures requires banks to demand certain information from customers which may be of personal nature or which have hither to never been called for. This can sometimes lead to a lot o questioning by the customer as to the motive and purpose of collecting such information. There is, therefore, a need for banks to prepare specific literature or pamphlets etc. so as to educate the customer of the objectives of the KYC program. The front desk staff needs to be specially trained to handle such situations while dealing with customers.

Introduction of new technologies

Banks should pay special attention to any money laundering threats that may arise from new or developing technologies including internet banking that might favor anonymity, and take measures, if needed, to prevent their use in money laundering schemes. Many Banks are engaged in business of issuing a variety of Electronic Cards that are used by customers for buying goods and services, drawing cash from ATMs, and can be used for electronic transfer of funds. Further, marketing of those cards is generally done through the services of agents. Banks should ensure that appropriate KYC procedures as duly applied before issuing cards to the customers. It is also desirable that agents are also subjected to KYC measures.

KYC for existing accounts

Banks were advised to all existing customers in a time bound manner. While the revised guidelines will apply to all new customers, banks should apply same to the existing customers on the basis of materiality and risk. However, transactions in existing accounts should be continuously monitored and any unusual pattern in the operation of the account should trigger a review of the CDD measures. Banks may consider applying monetary limits to such accounts based on the nature and type of the account. It may, however, be ensured that all the existing accounts of companies, firms, trusts, charities, religious organizations and other institutions are subject to minimum KYC standards which would establish the identity of the natural and legal person and those of the beneficial owners. Banks may 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 may consider closing the account or terminating the banking or business relationship after issuing due notice to the customer explaining reasons for taking such a decision. Such decision need to be taken at a reasonably senior level.

Applicability to branches and subsidiaries outside India

The above guidelines shall also apply to the branches and majority owned subsidiaries located abroad, especially, in countries which do not or insufficiently apply the FATF recommendations, to the extent local law permit. When local applicable laws and regulations prohibit implementation of these guidelines, the same should be brought to the notice of Reserve bank.

Appointment of Principal Officer

Banks may appoint a senior management officer to be designated as Principal Officer. Principal Officer shall be located at the head or corporate office of the bank and shall be responsible for monitoring and reporting of all transactions and sharing of information as required under law. He will maintain close liaison with enforcement agencies, banks and any other institution which are involved in the fight against money laundering and combating financing of terrorism.

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