KYC
KYC
KYC
ISSN 2250-3153
M.Com., MBA., NET, JRF, Chetan Business School, Institute of Management and Research, Hubli
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2006 edition of ACAMS Today (Association of Certified Anti- from staff that believed they were experienced, but in practice
Money Laundering Specialists) suggests the following: were not and consequently failed to find relevant information.
“A rigorous and robust process of investigation over and
above (KYC) procedures, that seeks with reasonable assurance to KYC Process Capability Maturity Model
verify and validate the customer‟s identity; understand and test A draft KYC Capability Maturity Model was published and
the customer‟s profile, business and account activity; identify shared with a range of international KYC practitioners in 2009
relevant adverse information and risk assess the potential for and 2010. An updated and peer-reviewed version will be
money laundering and / or terrorist financing to support published in the ACAMS ACAMS Today magazine in early
actionable decisions to mitigate against financial, regulatory and 2011.
reputational risk and ensure regulatory compliance.” The KYC Maturity Model is based on the typical 5 levels of
the standard Capability Maturity Model. These levels are
typically described as Initial, Repeatable, Defined, Managed and
VI. CHARACTERISTICS OF EDD Optimized and have very strict meanings. The KYC maturity has
1. Rigorous and robust however been somewhat simplified, renamed and re-built as
Generally this means consistent, thorough and accurate. The follows: Chaotic, Reactive, Proactive, Service Managed and
process must be documented and available for inspection by Value Managed. Practical process improvement learning‟s have
regulators. The process must be SMART (Specific, Measurable, also been taken from common manufacturing and IT productivity
Achievable, Relevant and Time bound), scalable and methodologies such as Lean, Agile, 6-Sigma, ITIL and Balanced
proportionate to the risk and resources. A Ball workflow system Scorecard.
ensuring that the KYC process and procedures are Defined,
Repeatable and Measurable is recommended.
2. Reasonable assurance VIII. CONTINUOUS DUE DILIGENCE
What is reasonable depends upon factors including CDD refers to the monitoring of clients and their activities to
jurisdiction, risk and resources. For sanction matches it depends see if the client does not change markedly over time. In effect
upon information provided by regulators. In all cases the this combats the possibility that an individual (or more often an
suggested standard is to the civil standard of proof i.e. on the organization) that has passed KYC is still who they say they are
balance of probability. and doing what they said they would do when they underwent
3. Relevant adverse information KYC checks. For example a corporate account set up honestly
Information obtained from any source, including the and openly by one person who passes KYC checks could be
Internet, free and subscription databases and the media, which is passed years later to another person that would not, without CDD
directly or indirectly indicative of involvement in money the services provider would not know that the new owner is
laundering, terrorist financing or predicate offenses. present. KYC (CDD) policy would normally demand KYC
Examples include fraud and other dishonesty, drug checks on the new owner regardless of the account history.
trafficking, smuggling or other proscribed offences, references to
money laundering, or conducting business, residing in or KYC is a client identification program that verifies and
frequenting countries deemed by the Financial Action Task Force maintains records of the identity and address of investors.
and/or (institution) as being countries under sanction or countries 1. KYC norms were introduced in 2002 by the Reserve
with which (institution) does not do business; to official Bank of India. It directed all banks and financial
sanctions or watch lists; and to investigations, convictions or institutions to put in place a policy framework to know
disciplinary findings by authorized regulatory bodies. their customers before opening any account. The
purpose was to prevent money laundering, terrorist
financing, theft and so on.
VII. OVER AND ABOVE KYC PROCEDURES 2. Today other regulators too have made KYC
EDD files rely upon initial client screening. This definition mandatory. The Securities and Exchange Board of
requires revalidation of the customer‟s identity – knowing the India (Sebi) has mandated it for mutual funds and
client‟s identity, not who they say they are. EDD processes broking accounts, the Insurance Regulatory
should use a tiered approach dependent upon the risk. Development Authority (IRDA) while buying
Crucial to the integrity of any EDD process is the reliability insurance and the Forwards Markets & Commission
of information and information sources, the type and quality of (FMC) for commodity trading. You need to submit it
information sources used, properly trained analysts who know even for making post office deposits.
where to look for information, how to look and how to IN BRIEF
corroborate, interpret and decide the results. Open source
intelligence companies such as World Compliance and C6, * KYC is mandated by most regulatory
aggregate this information and compile it daily into a authorities
comprehensive database. Estate Engineer (Civil) Sunil Ch. Das,
Agartala Searching on Google, for example, means different * Documents for proof of identity and address are
things to different people. Experience has shown poor returns needed.
* Certain investments may need PAN card details
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* Duplication of documents in some cases is Why does the bank ask you for proof of your identity and
possible address?
The identification of a customer is a very critical process
* Investee firms may also incur compliance cost with a view to protect the customer interests by preventing from
3. Documents needed: The mandatory details required fraudsters who may use the name, address and forge signature to
under KYC norms are proof of residence and identity. undertake benami / illegal business activities, encashment of
4. A person's ration card, passport, utility bills or a letter stolen drafts, cheques, dividend warrants, etc. This also helps to
from the employer or his housing society is accepted as safeguard banks from unwittingly used for the transfer of deposit
residence proof. For proof of identity, passport, voter of funds derived from criminal activity or for financing terrorism.
ID card, Permanent Account Number (PAN) card or Identification of customers will also help to control financial
driving license too could work. Nowadays, most frauds, identify money laundering and suspicious activities, and
institutions ask for the customer's PAN too. for scrutiny / monitoring of large value cash transactions.
5. Impact: Although the effort towards strengthening
identification norms has helped in preventing money Are KYC requirements new?
laundering and reducing fraud, it has had a negative No, KYC requirements have always been in place and
impact in an unexpected quarter. The growth in Banks have been taking KYC documents in accordance with the
investor numbers in various instruments is either guidelines issued by RBI from time to time. RBI has revisited the
stagnating or reducing. Apparently, the KYC norms KYC guidelines in the context of recommendations made by the
are proving restrictive because of the hassles of Financial Action Task Force (FATF) on Anti Money Laundering
documentation. standards and on Combating Financing of Terrorism and
6. The KYC requirement sometimes leads to unnecessary enhanced the KYC standards in line with international
and repetitive work, delaying operations. Customers benchmarks.
complain about the paperwork involved. Ultimately, it
means customers have to run from pillar to post for Is KYC mandatory?
complying with the KYC norms. Investors complain of Yes. It is a regulatory and legal requirement. Regulatory: In
being asked to provide details repeatedly or face a terms of the guidelines issued by the Reserve Bank of India
freeze on their accounts (RBI) on November 29, 2004 on Know Your Customer [KYC]
7. Impact for service providers: Companies and Standards – Anti Money Laundering [AML] Measures, all banks
distributors say, KYC requirements have burdened are required to put in place a comprehensive policy framework
them with substantial administrative obligations. The covering KYC Standards and AML Measures. Legal: The
verification rules place a financial burden on banks, Prevention of Money Laundering Act, 2002 (PMLA) which
insurance companies and mutual funds due to the came into force from July 1, 2005 (after “rules” under the Act
involved costs. Currently, every entity has to were formulated and published in the Official Gazette) also
individually conduct this verification which results in requires Banks, Financial Institutions and Intermediaries to
duplication of effort for customers as well as the ensure that they follow certain minimum standards of KYC and
institutions. AML as laid down in the Act and the “rules” framed there under
8. There is a need to simplify KYC requirements. The
authorities could opt for centralization of the KYC When does KYC apply?
norms to make investing easy for those not well versed KYC will be carried out at the following stages:
with paperwork. Mutual funds have done this at an 1. Opening a new account
industry level by giving the mandate to a single entity, 2. Opening a subsequent account where documents as per
CDSL Ventures. Uniformity in requirements for KYC current KYC standards not been submitted while
prescribed by all authorities would help make the filing opening the initial account
easier. One important document that will make life 3. Opening a Locker Facility where these documents are
simpler is - 'Aadhar', the unique identification number not available with the bank for all the Locker facility
to be provided to each citizen by Unique Identification holders
Authority of India (UIDAI), a government initiative. 4. When the bank feels it necessary to obtain additional
But there is still some time before it will be information from existing customers based on conduct
implemented. By making KYC norms simpler, it will of the account
make investments simpler. It is especially required if 5. When there are changes to signatories, mandate holders,
investing is to become more inclusive.‟ beneficial owners etc. KYC will also be carried out in
9. Beneficiaries of transactions conducted by professional respect of non-account holders approaching the bank for
intermediaries, such as Stock Brokers, Chartered high value one-off transactions.
Accountants, Solicitors, etc. as permitted under the
law, and any person or entity connected with a Who is your contact point in the bank for KYC purposes?
financial transaction, which can pose significant Your contact point in the Bank will be the Relationship
reputation or other risks to the Bank, say, a wire Manager / the official who opens your account and who is in
transfer or issue of a high value demand draft as a touch with you for your transactions.
single transaction.
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What is money laundering? approach the branch / sales staff. If you are a small depositor,
Money Laundering refers to conversion of money illegally would you still have to go through the stringent KYC
obtained to make it appear as if it originated from a legitimate requirements? While the internal procedures of the Bank and the
source. Money laundering is being employed by launderers guidelines of RBI require that satisfactory proof of your identity
worldwide to conceal criminal activity associated with it suahc as and address, RBI has simplified the KYC procedure with the
drugs / arms trafficking, terrorism and extortion. All crimes that objective of greater financial inclusion, i.e. making available the
produce a financial benefit give rise to money laundering. basic banking facilities to those persons who intend to keep
balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in
What has this got to do with opening bank accounts? all their accounts taken together and the total credit in all the
The first step in the laundering process for criminals is to get accounts taken together is not expected to exceed Rupees One
their money into an account with a Bank, often using a false Lakh (Rs.1,00,000/-) in a year. Help us to Help You Please help
identity and address. The funds so deposited will be transferred us to prevent crime, tax evasion and the laundering of the
to other accounts locally or abroad or used for buying goods or proceeds of such crime or evasion by being patient when staff
services. These transactions would appear to be like any legally asks you to provide documents to prove your identity. You can
earned money and becomes difficult to trace it back to its also help prevent crime against yourself and others by
criminal past. Banks under law should not only prevent this, but maintaining the confidentiality of your account details and
should stop criminals who wish to use the banking channel to identity documents. Indian Regulations on Prevention of Money
launder the ill-gotten money from illegal / criminal activities. Laundering – A customer must know Under the Prevention of
Money Laundering Act (PMLA) 2002, and the Rules thereof, the
How could this affect you as a customer? banks are required to report:
A key defense against money laundering is to prevent a) All cash transactions (deposits and withdrawals) of the
accounts being opened in false identities. Anyone wishing to value of more than Rupees Ten Lakhs or equivalent thereof in
open an account will therefore be asked for proof of their identity foreign currency;
and address. These documents have to be essentially obtained b) All series of cash transactions integrally connected to each
irrespective of the type of account to be opened and the purpose other, which have been valued below Rupees Ten Lakhs or its
for which the account is opened for. The fact that these equivalent in foreign currency where such series of transactions
documents are asked for opening of account does not mean that have taken place within a month and the aggregate value of such
you are suspected of money laundering. Criminals try to appear transactions exceeds Rupees Ten Lakhs.
to be normal law-abiding customers, for example they may try to c) All cash transactions were forged or counterfeit currency
open a number of accounts using small amounts of money. notes or Bank notes have been used as genuine and where any
Hence it is necessary to identify all prospective account holders forgery of a valuable security has taken place;
or customers. Anybody including a criminal could falsely use d) All suspicious transactions whether or not made in cash
your identity, if these identity documents are not obtained. and by way of as mentioned in the Rules.
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been greeted with great enthusiasm. But this could be a serious equaled, and quite possibly exceeded, by forces for change from
miscalculation of the changing landscape in financial services. within.
The fundamental role of a financial services company must be to The majority of respondents see it as important to achieve
make a profit by serving its customers. And more profit can be operational performance and to manage the hazards within the
made and more customers retained if the customers are well business but only a few are also beginning to view risk
served. This having been stated, what could be better than getting management as a proactive tool in the development of the
to know more about your customers? business strategy and strategic opportunities. Private banks, say
Knowing your customer should not be seen as a function to the Basel Committee, are particularly exposed to reputational
be relegated to Compliance, but a fundamental building block for risk, and should therefore apply enhanced due diligence to such
a profitable operation. Good intelligence is essential to planning operations. Development of strong brand is becoming
business strategy. Financial Institutions should reconsider any increasingly important.
initial negative reaction to these new regulations and should Image and reputation are ranked second as a key
avoid allowing valuable information to gather dust in the differentiator by chief executive officers in the PWC survey.
compliance department. Many banks have already paid millions They are also perceived as the second ranked criterion for clients
of dollars to understand and implement complex CRM programs selecting a private bank or wealth manager, and as the top ranked
and processes. Meeting regulatory compliance should be a measure of success. At a minimum, leaders must consider the
byproduct of knowing your client with successful and profitable effect that internal processes and procedures can have on the
customer relationships being the ultimate goal. reputation and brand of their organization. Institutions that do not
The institutions that understand that compliance with Know have a facility to meet these new regulations are unnecessarily
Your Customer regulations can be an investment rather than a exposing themselves to other significant risks that include civil
cost will reap the rewards of this new landscape. The increase in fines and significant penalties. External audit exemptions could
regulation over the past two decades has been a delicate game of result in a decreased share value for many highly profitable
cat and mouse between legislators and the financial services private banks. Investors must be confident that leadership has
industry. And moves to strengthen regulation in different parts of this issue under control. To look at the new KYC regulations as
the world have invariably followed hard on the heels of scandal – simply a compliance issue is the wrong approach. This is a glass
BCCI, Barlow Clowes, Marcos, and Abacha to name but a few. half full, not half empty.
Many politicians pay lip service to the sanctity of the individual‟s Knowing your customer is what the modern financial
right to financial privacy, but only up to point. The reality is in services industry is all about. The process allows you to manage
the massive amounts of new legislation moving through national your risk, but if properly implemented it should also provide the
and international bodies. Massive inroads have already been data to help steer your strategy, improve customer service, and
made into the privacy edifice by successive raids against drug increase profitability. Financial institutions must shake off the
trafficking, money laundering, corruption, tax evasion, and, as no „regulatory burden‟ mindset and seek to capitalize instead on this
one will need reminding, terrorism. Anonymity, whether „regulatory bonus‟. Performing effective due diligence is not
individual or corporate, is no longer to be tolerated and sources simply a compliance issue, but a golden opportunity to better
of funds must now be known. And there is no bucking this trend. understand your customers and their needs. Capturing and
Pressures are being brought to bear from many different utilizing the right information can transform an otherwise
directions and at many different levels – national governments, burdensome compliance process into a cornerstone of business
international bodies, multinational authorities, non-governmental development and customer relationship best practices.
organizations, self-regulatory groupings, and private sector or
professional associations. If there was any hope that this issue
would go away, the events of September 11th have dismissed X. CONCLUSION
that notion. The G7 leading industrialized nations set the ball 1) Banks doing KYC monitoring for anti-money
rolling with the creation of the Financial A action Task Force laundering (AML) and checks relating to combating the
Against Money Laundering. And the ranks have been swelled financing of terrorism (CFT) increasingly use
variously by parallel or supporting contributions from the specialized transaction monitoring software, particularly
Organization for Economic Cooperation and Development, the names analysis software and trend monitoring software.
International Monetary Fund, the United Nations, the Financial 2) Know Your Customer processes are also employed by
Stability Forum, and the Basel Committee on Banking regular companies of all sizes, for the purpose of
Supervision. ensuring their proposed agents', consultants' or
The latter‟s approach to „Know Your Customer‟ (KYC) distributors' anti-bribery compliance. Banks, insurers
standards is from a wider prudential perspective than money and export credit agencies are increasingly demanding
laundering alone. It originates from its concerns for market that customers provide detailed anti-corruption due
integrity and the direct and indirect losses that may be incurred diligence information, to verify their probity and
by banks that do not have or have not properly implemented integrity. Some specialist consultancies help
appropriate due diligence procedures. That there are increasing multinational companies and SMEs conduct Know Your
pressures on private banks in particular to verify the identity of Customer processes when entering new market.
their clients is no news to many of the largest banks in that 3) The adoption of effective know-your-customer (KYC)
group. Forces for change from without the industry have been standards is an essential part of banks' risk management
practices. As discussed in the Customer due diligence
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