Know Your Customer

Know your customer (KYC) is a bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them.

What are Objectives of KYC?

• Money laundering is a growing menace and it not only poses serious threat to the stability and integrity of the financial system but also to the sovereignty and safety of nations worldwide. In the coming days, challenges before banks would primarily lie in saving themselves from the growing threat of money laundering. Click Here to read India’s Efforts to Tackle Money Laundering
• In India, prevention of money laundering act (PMLA) was passed in 2002 and it has been aligned with the financial action task force (FATF) recommendations in 2009. Further, India has become a member of FATF in 2010.
• Banks are being extensively sensitised about money laundering and KYC norms.
• In India Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These ‘Know Your Customer’ guidelines have been revisited time to time in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT).
• These standards have become the international benchmark for framing Anti Money Laundering and combating financing of terrorism policies by the regulatory authorities. Compliance with these standards both by the banks/financial institutions and the country have become necessary for international financial relationships.

India-On Path of Unified KYC

• KYC discipline assumes critical importance especially in the light of our concerted efforts to widen the reach of banking as part of financial inclusion initiatives.
• Banks have to ensure a very high degree of KYC compliance and a very robust AML regime. Once these standards are achieved, a unified KYC for banking system could be thought of.
• In 2011, SEBI said that it would also come out with Homogenous norms for setting up a uniform Know Your Customer (KYC) Regulation Authority. It will relieve the burden comparable on the intermediaries as well as the common man, seeking to make investments.  This mechanism once set would make certain that KYC exercise is undertaken only once and enabling all intermediaries to access a prospective client's number for getting his KYC status.

Factsheet: Know Your Customer (KYC)

• Know Your Customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them.
• Know your customer policies are becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing.
• Beyond name matching, a key aspect of KYC controls is to monitor transactions of a customer against their recorded profile, history on the customers account(s) and with peers.
• Banks doing KYC monitoring for anti-money laundering (AML) and checks relating to combating the financing of terrorism (CFT) increasingly use specialized transaction monitoring software, particularly names analysis software and trend monitoring software. The generated alerts identify unusual activity which is then subject to due diligence or enhanced due diligence (EDD) processes that use internal and external sources of information on the subject, including the internet. This helps to determine whether a transaction or activity is suspicious and requires reporting to the authorities.
• Some specialist consultancies help multinational companies and SMEs conduct Know Your Customer processes when entering new markets.
• The Reserve Bank of India introduced KYC guidelines for all banks in 2002. In 2004, RBI directed that all banks ensure that they are fully compliant with the KYC provisions before December 31, 2005. The purpose was to prevent money laundering, terrorist financing and theft.

KYC and Damodaran Committee

• The committee, headed by former SEBI chief M Damodaran, has proposed a slew of consumer-friendly measures. The committee was set up by RBI and if the recommendations are accepted, Bank account holders can expect better standards of service and more secure ways of doing business. (all important recommendations here)
• In context with KYC, the committee recommended  third-party Know Your Customer data bank.

KRA

• In January 2012, the Capital markets regulator SEBI’s Chairman, Mr. U.K. Sinha, launched India’s first Know Your Customer Registration Agency – KRA at Bombay Stock Exchange.
• The system avoids duplication of customer details and is interoperable, which means that other market participants can share the data and bring in more uniformity.