TRADITIONAL METHODS OF VERIFICATION KYC AND ONLINE–KYC

With the increase in financial transactions and development in technology the risk involved also increases. Thus, when an institution is involved in a financial transaction with their customer, it is necessary to know who they are dealing with or who their customer is to avoid risk of fraudulent transactions or misuse of funds with fake identities.

Know Your Customer or KYC or Know Your Client is a process through which a customer’s original and true identity can be verified through the information or documents submitted by the customer. Any information submitted by the customer is treated as confidential information and it cannot be shared with anybody else without the consent of the customer.

Evolution of Methods of Verification Process.

In India, the KYC procedure is not new, though the first circular was issued in 2002, it dates back to 1965. Some of the Initial steps taken by the RBI regarding KYC are as follows :

  • 1965 – Banks were asked to ensure that full and correct addresses of the depositors are recorded (Benami accounts & avoidance of tax).
  • 1976 – For opening of bank accounts, in order to establish the identity of account holders/avoid benami accounts, the concept of “introduction” was prescribed.
    Where an already existing account holder would introduce another customer who wants to open an account in the bank.
  • 1987 – There should be reasonabe gaps of say, 6 months between the time an introducer opens his account and introduces another prospective account holder to the bank. Introduction of an account should enable proper identification of the person opening an account so that the person can be traced if the account is misused.
  • 1991 – No cash transactions above ₹50,000/- for Travellers cheques/ Demand Drafts/ Mail Transfers and/Telegraphic Transfers.
  • 1993 – Banks to keep vigil over heavy cash withdrawals by account holders which may be disproportionate to their normal trade/ business requirements and cases of unusual trends.
  • 1994 – The banks to introduce the practice of obtaining photographs of the depositors/account holders who are authorised to operate the said accounts at the time of opening of all new operative accounts.
  • 1995 – Monitoring and special reporting for cash transaction of value more than 10 Lakh.
  • 1999 – Confirmation by post from both the customer and the introducer before issue of the cheque book.
  • 2002–KYC circular.

On August 22, 2002, The RBI issued certain guidelines on “Know Your Customer” to all commercial banks. It is the first circular on KYC. The two-fold objectives of the KYC framework was:

  1. To ensure appropriate customer identification.
    According to the 2002 circular, the KYC procedure was considered to be an important identification procedure for an individual/corporate. If the customers wanted to open a bank account they were supposed to submit necessary documents like passport, driving license etc. for verification. if such documents were not available, any person who already has an account in the bank had to introduce the customer to the bank.
  2. To monitor transactions of a suspicious nature.
    Banks were now required to keep a close watch on cash transactions above ₹10 lakhs and maintain a separate record for the same. They were also supposed to report these transaction and transactions of suspicious nature to the appropriate authority.

In 2005, the KYC procedure were relaxed for small account holders, where, they could open bank accounts without any documentation by giving a self-certification in the presence of the bank official.

In 2010, the unique identification number i.e. the Aadhaar was added as an official valid document for the KYC procedure.

In 2012, due to the increasing financial transactions and its complexity the RBI advised the banks to issue Unique Customer Identification Code for each customer as it would help to identify customer, track the facilities availed by them and also to monitor financial transactions and to avoid multiple identities of a customer in a bank.

In 2013, to avoid fraud, document forgery and have paperless verification banks were advised to use e-KYC service launched by the UIDAI as a valid process for KYC verification. Where the institution would sign an agreement with UIDAI to use these services.

In 2016, the RBI issued certain Directions named” Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016. Which is applicable to all entities regulated by the RBI and includes the directions issued by it in the earlier circulars.

Online-KYC or Electronic know your customer (e-KYC).

The Unique Identification authority of India (UIDAI) launched e-KYC services using the Unique Identification Number or the 16 digit Aadhaar number to verify the identity and the address of the customer. It is valid as a certified copy of an Aadhaar card.

E-KYC or electronic know your customer is a process of verifying the identity of the customer digitally with the consent of the customer. In other words, the UIDAI will provide or share the information of the customer like address, photograph, date of birth etc. to the financial institutions, service providers etc. only when the customer consents to it through biometric information such as finger print or retinal image, usually the fingerprints are scanned to get access to the information. The customer can also opt for OTP or One Time Password based authentication, where the OTP is sent to the registered mobile or email (if submitted) of the customer.

This process of E-KYC is considered to be easy and convenient procedure as it is paperless and does not require much documentation which is otherwise required. It also reduces the work of the service providers or institution who has to maintain and safeguard the information provided by their customer.

The UIDAI has also enabled Aadhaar Paperless Offline e-KYC where the verification of a customer can be done without sharing biometric information or Aadhaar number through the QR code on the Aadhaar card or generating the digitally signed XML from the UIDAI portal.

DOCUMENTS VALID FOR THE KYC VERIFICATION

According to the RBI’s KYC directions, 2016, for verifying the identity of a customer who is an individual the following documents can be submitted :

  • Certified copy of any Officially Valid Document (OVD) containing the details of his identity and address.
  • Recent photograph.
  • The Permanent Account Number or Form 60 defined under Income tax Rules, 1962
  • Any other documents specified by the Regulated Entities in their KYC policy.

According to the KYC guidelines 2016 of the RBI the following are considered as Official Valid Documents (OVD):

  • Passport
  • Proof of Possession of Aadhaar number in the form issued by the Unique Identification Authority of India.
  • Voters ID issued by the Election Commission of India.
  • Job card issued NREGA duly signed by an officer of the state government.
  • Letter issued by the National Population Register containing details of name and address.
  • Where the OVD does not contain the updated address the customers can submit the following documents for the limited purpose as proof of address as after submitting the following the customer has to submit OVD with the updated address with a period of 3 months:-
    • Utility bill of any service provider- electricity, telephone, post-paid mobile phone, piped gas, water bill, which is not more than two months old.
    • Property or municipal tax receipt.
    • Pension or family pension payment orders (PPOs) issued to retired employees by Government Departments or public sector undertaking if it contains the address.
    • Letter of allotment of accommodation from employer by state or central government departments, public sector undertakings, financial institutions and listed companies and leave and licence agreements with employers allotting official accommodation.
    • In case of foreign nationals, if the OVD produced by them does not contain the details of address then the documents issued by departments of foreign jurisdictions and letter issued by foreign Embassy in India can be produced as proof of address.

In case of a sole proprietary firm: in addition to the documents required to verify the proprietor (individual) any two of the following documents for the proof of business in the name of proprietary firm are required:

  • Registration certificate
  • Certificate/licence issued by the municipal authorities under the shops and Establishments Act.
  • Sales and income tax returns.
  • CST/VAT/GST certificate (provisional/final).
  • Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities.
  • *Importer Exporter Code (IEC) issued to the proprietary concern by the office of DGFT or Licence/certificate of practice issued in the name of the sole proprietary concern by any professional body incorporated under the statute.
  • Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm’s income is reflected, duly authenticated/acknowledged by the Income Tax authorities.
  • Utility bills – electricity, water, landline telephone bills, etc.

In case of a Company, the certified copies of the following documents are required:

  • Registration certificate
  • Certificate/licence issued by the municipal authorities under the shops and Establishments Act.
  • Sales and income tax returns.
  • CST/VAT/GST certificate (provisional/final).
  • Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities.
  • *Importer Exporter Code (IEC) issued to the proprietary concern by the office of DGFT or Licence/certificate of practice issued in the name of the sole proprietary concern by any professional body incorporated under the statute.
  • Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm’s income is reflected, duly authenticated/acknowledged by the Income Tax authorities.
  • Utility bills – electricity, water, landline telephone bills, etc.

In case of a Company, the certified copies of the following documents are required:

  • Certificate of incorporation
  • Memorandum of Association
  • Articles of Association
  • Permanent Account Number of the company
  • A resolution and the power of attorney from the Board of Directors granted to the managers, officers or employees to transact on its behalf.
  • Documents of the managers, officers or employees (individual) holding an attorney to transact on behalf of the company.

In case of a partnership firm the certified copies of the following documents are required:

  • Registration certificate.
  • Partnership Deed.
  • Permanent Account Number of the partnership firm.
  • Documents of the person holding an attorney to transact on behalf of the firm.

In case of a trust, the certified copies of the following documents are required:

  • Registration certificate.
  • Trust Deed.
  • Permanent Account Number of the trust.
  • Documents of the person holding an attorney to transact on behalf of the trust.

In case of an unincorporated association or a body of individuals such as unregistered trust or partnership firms or societies, the certified copies of the following documents are required.

  • Resolution of the managing body of such association or body of individuals.
  • Permanent Account Number or Form 60 of such association or body of individuals.
  • Power of attorney granted to transact on its behalf.
  • Documents of the person holding an attorney to transact on its behalf.
  • Any other information required.

With the tremendous growth in the economic activities and scientific and technological developments it has become an important part of any business to identity the persons with whom they are transacting to avoid the risk of crimes. With the upgradation of the traditional methods of customer verification to digital or online verification it has become an easy process. Digital KYC is also considered to be a safe and secure process of verification as the information does not pass through various intermediaries. e-KYC is an initiative to provide easy and better service to the customers and to avoid the long and costly process of traditional methods of KYC verification.