This is some dummy text to display as a ticker
What is KYC all about?
By Prem Gursahani, Banking Consultant, APCORE
Published On January 5, 2021
Reading Time 10 Minutes
‘Know Your Customer’ or ‘Know Your Client’ (KYC) has become the most talked about pain point across the country!
Read the Article to address Customer Pain Points!
WHAT IS KYC?
KYC in the simplest terms is –
- Identifying a person or an entity,
- Verifying the identity/address of the person or an entity,
- Obtaining information on the purpose and intended nature of the business relationship, and
- Identifying beneficial owner, if any, in case of entities.
WHY KNOW YOUR CUSTOMER (KYC)?
- KYC is a significant preventive element in the global fight against money laundering and combating financial terrorism
- KYC is a mandatory statutory requirement. It is the global requirement mandated by Financial Action Task Force (FATF), a global watchdog and policy making body, responsible for prevention of money laundering and terrorist financing.
- Look at the library of recommendation made by FATF in their Report. A mere glance at the titles of recommendations reveals the need for Anti Money Laundering (AML) / Combating Financial Terrorism (CFT) / Know Your Customer/Client (KYC) Policies and global co-operation required in the prevention of money laundering and terrorist financing activities. A reading of the recommendations (attached) will enlighten every citizen and even a banker, and all the questions about the need for KYC will vanish.
- In India, it is Prevention of Money Laundering Act, 2002 and Rules framed thereunder, based on a mandate from the FATF, to which more than 200 countries have subscribed their allegiance and agreed to take all necessary steps to prevent money laundering and terrorist financing.
Indian requirements are no different from other countries across the globe!
IS STATUTORY REQUIREMENT, THE ONLY REASON FOR KYC?
- Risk mitigation is another reason for ‘Know Your Customer (KYC)’
- If you desire to do any business with any person, that person would like to know you, to minimize risks in doing business with an unknown person. Right!
- Does this explain ‘Why KYC is required?’
- Let us make another attempt to explain it further?
- If you place an order with anyone, for supply of certain goods at your office, should the supplier not have your correct address so that the goods sent to you do not get returned? If you are not making advance payment and would make cash payment on delivery, should the supplier not know more about you and your paying capacity, your activities to be able to take the risk of sending goods to you, particularly when the ‘to and fro’ cost of transportation may exceed the profit margin?
It is therefore, a responsibility of every law-abiding citizen to understand the genesis of KYC requirements and co-operate with the service providing entities!
WHO MUST DO KYC?
- All reporting entities are required to do KYC.
- As per statutory provisions, reporting entities include banks, financial institutions, intermediaries and persons carrying on a designated business or profession.
- A detailed list of reporting entities is given in the Appendix.
- In addition to the reporting entities detailed in the Appendix, under the directions of Supreme Court of India issued in February, 2017, telecom service providers are also required to verify the identity of all mobile phone users.
WHAT BANKS ARE SUPPOSED TO DO?
- Banks must verify the identity of their clients, and beneficial owners.
- “Client” means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.
- “Beneficial Owner” means an individual who ultimately owns or controls a client of a bank or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.
- “Person” includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals whether incorporated or not, any artificial judicial person, any agency, office or branch owned or controlled by any of these persons mentioned here
IN WHICH CASES BANKS SHOULD DO KYC?
- At the time of commencement of an account-based relationship, a bank must –
-
- identify its clients,
- verify their identity,
- obtain information on the purpose and intended nature of the business relationship; and
- determine whether a client is acting on behalf of a beneficial owner, and identify the beneficial owner and take all steps to verify the identity of the beneficial owner.
- In addition, a bank must verify the identity –
-
- while carrying out any ‘transaction’ of an amount equal to or exceeding Rs.50,000/-, whether conducted as a single transaction or broken into several smaller value transactions that appear to be connected, or carrying out any international money transfer operations.
“Transaction” referred above means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes –
-
- Opening of an account;
- Deposits, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means,
- The use of a safety deposit box (Locker) or any other form of safe deposit;
- Entering into any fiduciary relationship (representative like Advocate, Chartered Accountant, Portfolio Manager);
- Any payment made or received in whole or in part of any contractual or other legal obligation;
- Any payment made in respect of playing games of chance for cash or kind including such activities associated with casino, and
- Establishing or creating a legal person or legal arrangement.
Did you like the Article?
You may circulate the link https://alphapluscore.com/insights to your colleagues in your organisation as well as to your friends and relatives to enhance their knowledge!
Sharing is Caring! 😊
You may also download the Article – Click Here
Please show your magnanimity
and give your valuable feedback
be it positive or negative!!
[email protected]
WHAT NEXT?
Having understood why KYC needs to be done,
let us move on to How KYC must be done
International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation
The FATF Recommendations
( www.fatf-gafi.org/recommendations )
Paris, 16 February 2012
Money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction are serious threats to security and the integrity of the financial system.
The FATF Standards have been revised to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. At the same time, these new standards will address new priority areas such as corruption and tax crimes.
The revision of the Recommendations aims at achieving a balance:
- On the one hand, the requirements have been specifically strengthened in areas which are higher risk or where implementation could be enhanced. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption.
- On the other, they are also better targeted – there is more flexibility for simplified measures to be applied in low risk areas. This risk-based approach will allow financial institutions and other designated sectors to apply their resources to higher risk areas.
The FATF Recommendations are the basis on which all countries should meet the shared objective of tackling money laundering, terrorist financing and the financing of proliferation. The FATF calls upon all countries to effectively implement these measures in their national systems.
| FATF Recommendations 2012 | ||||
| A | AML/CFT POLICIES AND COORDINATION | E | TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS | |
| 1 | Assessing risks & applying a risk-based approach | 24 | Transparency and beneficial ownership of legal persons | |
| 2 | National cooperation and coordination | 25 | Transparency and beneficial ownership of legal arrangements | |
| B | MONEY LAUNDERING AND CONFISCATION | F | POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES AND OTHER INSTITUTIONAL MEASURES | |
| 3 | Money laundering offence | Regulation and Supervision | ||
| 4 | Confiscation and provisional measures | 26 | Regulation and supervision of financial institutions | |
| C | TERRORIST FINANCING AND FINANCING OF PROLIFERATION | 27 | Powers of supervisors | |
| 5 | SRII Terrorist financing offence | 28 | Regulation and supervision of DNFBPs | |
| 6 | SRIII Targeted financial sanctions related to terrorism & terrorist financing | Operational and Law Enforcement | ||
| 7 | Targeted financial sanctions related to proliferation | 29 | Financial intelligence units | |
| 8 | Non-profit organisations | 30 | Responsibilities of law enforcement and investigative authorities | |
| D | PREVENTIVE MEASURES | 31 | Powers of law enforcement and investigative authorities | |
| 9 | Financial institution secrecy laws | 32 | Cash couriers | |
| Customer due diligence and record keeping | General Requirements | |||
| 10 | Customer due diligence | 33 | Statistics | |
| 11 | Record keeping | 34 | Guidance and feedback | |
| Additional measures for specific customers and activities | Sanctions | |||
| 12 | Politically exposed persons | 35 | Sanctions | |
| 13 | Correspondent banking | G | INTERNATIONAL COOPERATION | |
| 14 | Money or value transfer services | 36 | International instruments | |
| 15 | New technologies | 37 | Mutual legal assistance | |
| 16 | Wire transfers | 38 | Mutual legal assistance: freezing and confiscation | |
| Reliance, Controls and Financial Groups | 39 | Extradition | ||
| 17 | Reliance on third parties | 40 | Other forms of international cooperation | |
| 18 | Internal controls and foreign branches and subsidiaries | |||
| 19 | Higher-risk countries | |||
| Reporting of suspicious transactions | ||||
| 20 | Reporting of suspicious transactions | |||
| 21 | Tipping-off and confidentiality | |||
| Designated non-financial Businesses and Professions (DNFBPs) | ||||
| 22 | DNFBPs: Customer due diligence | |||
| 23 | DNFBPs: Other measures | |||
Appendix
| Reporting Entities | |||
| 1 | Banking Companies | (i) | All Banks including State Bank of India |
| (ii) | Co-operative Banks (State Co-operative Banks, Central Co-operative Banks and Primary Co-operative Banks) | ||
| (iii) | Regional Rural Banks | ||
| 2 | Financial Institutions | (i) |
Financial Institution: A Non-Banking Institution carrying on as its business or part of its business any of the following activities:
|
| (ii) | Chit Fund Companies | ||
| (iii) | Housing Financing Institutions | ||
| (iv) |
Authorised Persons:
|
||
| (v) |
Payment System Operators:
|
||
| (vi) |
Non-Banking Finance Companies:
|
||
| (vii) | Department of Posts | ||
| 3 | Intermediaries | (i) |
|
| (ii) |
|
||
| (iii) | Intermediary registered by PFRDA | ||
| (iv) | Recognised stock exchanges | ||
| Persons carrying on a designated business or profession and such other activities as the Central Government may, by notification, so designate, from time to time | (i) | Person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino; | |
| (ii) | Inspector-General of Registration (Registration of Properties) | ||
| (iii) | Real Estate Agent | ||
| (iv) | Dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government; (Precious Metal means gold, silver, platinum, palladium or rhodium or such other metal as may be notified by the Central Government) | ||
| (v) | Person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or | ||
| (vi) | Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, 2002 | ||
Note: ‘Person’, wherever mentioned, includes:
|
|||
Share
