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Frequently Asked Questions (FAQs) - Know Your Customer
1. What is KYC?

KYC is an acronym for "Know your Customer", a term used for the Customer identification process. It involves making reasonable efforts to determine the true identity and beneficial ownership of accounts, source of funds, the nature of customer's business, reasonableness of operations in the account in relation to the customer's business etc. which in turn helps the banks to manage their risks prudently.
The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering.

2. Who is a Customer?

For the purpose of KYC policy a 'customer" is defined as:
  • A person or entity that maintains an account and/or has a business relationship with the Bank;
  • One on whose behalf the account is 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 connected with a 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.
3. What is the Customer Identification Procedure?

Customer identification means identifying the customer and verifying his/her identity through reliable and independent documents, data and information. Banks have been advised to lay down 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.

4. What are some of the key requirements of the 'Know Your Customer' (KYC) process?

Banks are required to :
  1. Ensure that no account is opened in anonymous or fictitious names or on behalf of (other) persons whose identity has not been disclosed or cannot be verified or when the identity of the customer matches with any person with known criminal background or banned entities;
  2. Establish the identity of the customer, obtain sufficient information on the nature of business/the purpose of the account, verify the legal status of the (legal) person/entity, verify the identity of the authorised signatories and demonstrate that reasonable measures have been taken to identify the beneficial owner(s) and verify his/her/their identity in a manner to be satisfied as to who the beneficial owner(s) is/are
  3. Satisfy competent authorities that normal banker's prudence and due diligence was observed in accordance with the requirements of existing guidelines, laws and regulations.
5. When is KYC applicable?

KYC is applicable and will be carried out for the following but is not limited to:
  1. Opening a new account or commencing a relationship.
  2. Opening a subsequent account where documents as per current KYC standards are not submitted when opening the initial account .
  3. After periodic intervals based on RBI guidelines.
  4. When there are changes to signatories, mandate holders, beneficial owners etc.
  5. When the bank feels it is necessary to obtain additional information from existing customers basis certain trigger events:-
    • For high value one-off transactions including a perceived mismatch of the customer's profile/financial standing versus the transaction(s) to be conducted
    • There is material change in the way the account is operated
    • There is a significant change to the Customer Acceptance Procedures
    • Necessitated by regulatory or statutory changes
6. Is KYC mandatory?

Yes. It is both a regulatory and legal requirement. As per the guidelines issued by the Reserve Bank of India (RBI) on
29 November 2004 on Know Your Customer [KYC] Standards – Anti Money Laundering [AML] Measures, banks are required to put in place a comprehensive policy framework covering KYC Standards and AML Measures. The PMLA that came into force from 1 July 2005 requires Banks, Financial Institutions and Intermediaries to ensure that they follow certain minimum standards of KYC and AML as laid down in the Act and the "rules" framed thereunder.

7. Is the information given by me to the bank under KYC is treated as confidential?

Yes. The information under KYC collected from the customer for the purpose of opening of account or otherwise is treated as confidential and is not disclosed to any person, except where required under the provisions of applicable laws, regulations and/or statutory codes.

8. Is there any legal backing for verifying identity of clients?

Yes. Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.

9. What action can the Bank take if the required KYC information / documents are not provided to the Bank?

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 is entitled to refuse opening of the account for a prospective customer or can, for an existing customer, consider closing the account or terminating the banking/business relationship after issuing due notice explaining the reasons for taking such a decision.

References and links

Central Banking Institution of India
FAQs on Know Your Customer Guidelines released by The Reserve Bank of India
http://rbi.org.in/scripts/FAQView.aspx?Id=82

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