What is a KYC or Know Your Customer Form?
The term KYC or Know your customer is used to/for customer identification which involves efforts to identify an individual or an entity by verifying the personal credentials, like sources of funds, the fairness of business and its operations, the nature of the business, personal documents of the customer, like PAN, AADHAR, Birth Certificates, and address proof.
Objectives of the KYC
The primary objective is to cover the bank from future risks. Risks may arise from improper conduct of the customer or an entity, criminal elements taking advantage of the banking facility. With the KYC in place, the bank will be able to create better controls, as well as be vigilant against inappropriate conduct by the account holder and take cognizance as per the legal framework.
A KYC has two parts:
- Identity
- Address
The identity that needs to be verified are:
- Named account holder
- Beneficial owner
- Signatories to an account
- Intermediary parties.
The stages at which the Identification will have to commence:
- At the onset of establishing a banking relationship
- At the insistence of the bank, when it deems fit, based on the conduct of the account
The usual Documents that are required for the identification of the name:
- Passport
- PAN card
- Voter identity card
- Driving license with photograph
- Identity card/Adhaar Card
- A letter from an authorized public authority confirming the identity and residence of the customer to the fulfillment of the branch official sanctioned to open the account
- Authorization/ letter from employer/other banks (subject to the approval of the branch official authorized to open the bank account).
Documents to verify the address are:
- Telephone Bill,
- Bank account Statement
- Electricity bill
- Ration Card
- Letter from employer to the approval of the bank
There may be periodic requests made by the bank for updating the above credentials.
Elements of KYC
KYC basically incorporates the following elements:
- Customer Acceptance Policy
- Procedures for Customer Identification
- Transaction monitoring mechanisms
- Risk Management
Customer Acceptance Policy
- Risk perception is created as per the customer profile and categorized. Based on risk profiling, the acceptance criteria is decided.
- Accept the individual as a customer after verifying the identity as per the laid down Identification of Customer
- No accounts will be allowed to open in the name of Anonymous/fictitious and Benami holders.
- Care needs to be taken that in the process of due diligence, the banking service should not leave out the socially and economically backward sections of the society.
Procedure for Customer identification
A prospective customer is someone who they claim to be. Sufficient information needs to be obtained before the bank is absolutely satisfied with the establishment of the identity. The nature of business and predictable patterns of the transactions, proof of identity and address are some of the information that may be gathered.
Transaction Monitoring Mechanism
The monitoring of the transaction will only take place if the customer falls in the category of the appropriate risk profile. Special attention is given to complex and unusual transactions. They may be large or belong to a pre-decided pattern. Any transaction effort which does not fit the profile of the customer will be looked into and detailed scrutiny will be undertaken.
After all, the relevant checks have been made and an inappropriate motive has been established, will the bank notify the relevant authorities and the account be placed under PML Act, 2002. The records of such an account will be preserved and kept for further discussion and detailed scrutiny.
Branches will also be responsible for the maintenance of vigilance on any transaction of INR 10 lakhs and more. The branches will also have to be reporting the same to their controlling offices with account statements. This has to be every fortnight.
The controlling offices will be further scrutinizing them and if they find merit in the reports will make additional queries to the branch. If the controlling office finds that the transactions are in consonance with the profile, then they would request the branch to close the case. The Branch would then direct the relevant officer to close the report.
Risk Management
The Board of Directors of the bank have to ensure that the KYC procedure is in place and followed diligently. In order to that, the following activities need to be in place:
- Roles and responsibilities need to be effectively defined
- Proper supervision of the management
- Training of the staff
- Effective usage of Systems and Controls
- Segregation of training processes for staff
The rigorous implementation of the KYC policies goes a long way in ensuring a better banking environment. It is also beneficial if the frontline banking staff to understand the efficacy of the KYC policies and the underlying premise for implementing the same.