Many of us who invest money in Mutual Funds are familiar with term “KYC” in our dealings with a fund house or AMCs. What is KYC ? It is the abbreviated form of the words “ Know Your Customer. The Reserve Bank of India came out with a set of broad guidelines on 29th November in 2004 on KYC standards- Anti Money Laundering ( AML) Measures in terms of which all the banks are required to have a comprehensive policy framework covering KYC Standards and AML Measures and the relevant circular of RBI also require the bank to comply with the provisions of the circular. The Prevention of Money Laundering Act, 2002, which came into effect from 1st July,2005 also requires all the banks, financial instructions and other intermediaries to ensure that they follow the standards of KYC and AML as laid in the act.
The idea to frame a legislation and the Circular issued by the RBI is obvious enough. These are measures intended to curb and prevent the use of our normal banking channels by suspicious and criminal elements who operate both at the national and international levels to launder their tainted money. It also aims at providing a means to the banks to know the profiles of their respective customers to understand and assess their needs to serve them better.
The Key Elements of A KYC Policy
All the banks need to incorporate the following key elements into their KYC policies:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management.
It is important to note here that the term “Customer” has broader import under a KYC policy.
The term includes a person or entity that maintains an account or has a business relationship with the bank and a beneficial owner, beneficiaries of transactions conducted by professional intermediaries such as Stock Broker, 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, for instance, a wire transfer or issue of a high value demand draft as a single transaction .
Why KYC is Needed
The need for KYC to establish the identity of the client and to verify the legal status of the person or entity and the identity of the authorized signatories and the identity of the beneficial owners of the account. It also ensures collection of authentic information on the nature of employment or business that the customer is supposed to undertake and the purpose of the account .
The Applicability of KYC
The KYC would apply to transactions involving opening of an account ; opening of subsequent 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 there are changes to signatories, mandate holders, beneficial owners etc.; it would also be applicable in respect of non-account holders approaching the bank for high value one-off transaction.