KYC- AS A CONCEPT AND USE CASES

KYC is short form for Know Your Customer. The Reserve Bank of India introduced KYC guidelines for banks in 2002. It is a process of customer verification. This process enables business entity to verify the identity of their client or customer, before or during the time that they start doing business with them. KYC is means of identifying and verifying the identity of the customer through independent and reliable source of documents, data or information

Need for kyc

Financial Action Task Force (FATF), an inter-governmental organization founded as an initiative of G7 to develop policies to combat money laundering, spotted the need for much effective guidelines for KYC. These guidelines were important to make the following acts more effective:

  • Combating Finance of Terrorism (CFT)
  • Anti-Money Laundering act (AML)

Based on recommendations of FATF a circular was passed in the year 2004 by RBI. KYC policies have become very important globally. With issues pertaining to corruption, terrorist financing, and money laundering becoming so prevalent, KYC policies have now evolved into an important tool to combat illegal transactions in the international finance field. KYC as a process and a precaution enables entities to protect themselves by ensuring that they are doing business legally and with legitimate entities, and it also protects the individuals who might otherwise be harmed by financial crime.

Applicability of kyc.

KYC process is mandatory to be followed by every financial institution. A customer needs to comply for KYC process in case:

  • While opening an account in a bank
  • When there are not enough documents with the bank in existing account
  • While investing in a mutual fund

It is important to note that based on norms, financial institutes may ask for a mandatory KYC process in other instances too

KYC- as a mandate or optional

As mentioned above, KYC guidelines are mandatorily to be followed by the Financial Institutions in India as a requirement of compliance and not as a choice or preference. Failure to produce necessary information as a customer, required to complete the process of KYC can result in denial to get such services by such financial institutions. For example- On such failure to complete the process of KYC, a bank would refuse to open an account or discontinue an existing account also.

KYC is a set of procedure that an individual, a group or any organization will undergo while dealing with any financial institute. Verification of Identity proofs, proof of address, legal status, verification of signature are few of the processes that a person will undergo in KYC as a requirement to comply with this process.

Core elements of kyc

Customer Identification Procedure-Creation of Customer Profile/Record

  • Risk classification of accounts- risk based approach
  • Risk Management/Mitigation
  • Ongoing monitoring of account activity
  • Reporting of cash and suspicious transactions as a precautionary measure to prevent money laundering and such similar issues.
  • Due diligence with respect to KYC guidelines from RBI
  • Compliance measures and mechanism
KYC- update of information

KYC is a process which requires regular update of the information on basis which KYC process was completed initially. Such regular update ensures the very objective of KYC to be fulfilled effectively, and also latest information with respect to a customer can be updated in records of the financial institutions. For example- Address of a customer may change and such change should be updated in terms of their latest address to endure effective application of KYC as a tool to verification of one’s customer.

Documents required for kyc process

Individuals (Documents acceptable as proof of identity/address)

  • Passport
  • Voter's Identity Card
  • Driving License
  • Aadhaar Card
  • NREGA Card
  • PAN Card

Any one original document towards proof of identity and proof of address (either permanent or current)

Minor

If minor is less than 10 years of age, ID proof of the person who will operate the account to be submitted. In cases where minor can operate the account independently, KYC procedure for identification/address verification as in the case of any other individuals would apply.

NRIs
  • Passport and Residence Visa Copies, duly attested by:
  • Foreign offices
  • Notary Public
  • Indian Embassy

Officers of correspondent banks whose signatures are verifiable through an authorized branch of the Bank.

Sole Proprietorship

In addition to the KYC documents including PAN of the proprietor, copies of any or as prescribed by a particular financial institution of the following documents in the name of the proprietary concern are required to be submitted.

  • Registration certificate
  • Certificate/license issued by the municipal authorities under Shop and Establishment Act
  • Sales and income tax returns.
  • CST/VAT/GST certificate (provisional/final).
  • Certificate/registration document issued by Sales Tax/Service Tax /Professional Tax Authorities.
  • IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT/ License/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a 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.
  • Latest Utility bills such as electricity, water, and landline telephone bills (not older than two Months)
Partnership firms
  • Copy of Registration Certificate, if the firm is registered.
  • Copy of PAN of the Partnership firm.
  • Copy of Partnership Deed.
  • Power of Attorney granted to a partner of an employee of the firm to transact business on its behalf.
  • Copies of proof of identify and proof of address along with PAN of the main partners.
  • Copy of Proof of Legal name, telephone number of the firm and partners apart from the above.
Limited Liability Partnership (LLP)
  • Copy of the Certificate of Incorporation (mentioning LLPIN) document and DPIN of the designated partners.
  • Copy of the LLP agreement
  • Copy of PAN of LLP.
  • Copies of proof of identify and proof of address along with PAN of the designated partners and persons holding the Position of Authority.
  • Copy of the Resolution to open an account and list of authorized person/s with the specimen signatures to operate the account duly attested by Designated Partners.
Companies
  • Copy of Certificate of incorporation (mentioning CIN).
  • Copy of Memorandum & Articles of Association.
  • Copy of PAN of the Company.
  • Resolution of the Board of Directors to open an account and list of officials authorized to operate the account.
  • Identification of authorized signatories should be based on photographs and signature cards duly attested by the company.
  • Copies of proof of identify and proof of address along with PAN of managers, officers of employees holding Power of Attorney to transact business on its behalf.
  • List of directors along with DIN and copy of Form 32 (if directors are different from AOA).
  • Certified true copy of Certificate of commencement of business (Public Limited Company).
  • Copy of Proof of the name of the company, Principal place of business, mailing address of the company, Telephone/Fax number apart from the above. (Telephone bill not older than two months).
Trust/Association/Club/Society
  • Certificate of Registration, if registered.
  • Copy of PAN of Trust / Association / Club / Society.
  • Power of Attorney granted to transact business on its behalf, if any.
    Any document listing out the names and addresses of the trustees, sellers, beneficiaries, and those holding power of Attorney, and other key officials involved in the day to day management of the trust to the satisfaction of the bank.
  • Resolution of the managing body of the foundation.
  • Declaration of Trust/Bye Law of society/Bye-law of Association/Bye-law of club.
  • Attach the Proof of name and address of the founder, Manager/director and the beneficiaries, telephone/fax number, Telephone bill, Utility bill apart from the above (bills not older than two months)
HUF (Hindu Undivided Family)
  • Copy of PAN of the HUF
  • Copy of Identity and Address proof of the Karta (Head of HUF).

Note: All the persons related to the account and authorized to operate the account must provide separate identity and address Proof in conformity with the details furnished in the application form.

What is required of financial institutions to meet KYC guidelines?

While the regulatory requirements and expectations for KYC vary by jurisdictions, here are some general guidelines:

  • Perform and complete customer due diligence before entering into a business engagement.
  • Customers’ information need to be crosschecked against the watch lists indicated by regulators, which contain details of unscrupulous/defaulting individuals and organizations that are restricted from conducting business transactions.
  • After the due diligence process is completed, ongoing tracking and monitoring of customers’ transactions is required to constantly keep a lookout for suspicious activities.
  • Once the business relationship has been established with a customer, periodic risk-based monitoring of the client is recommended to ensure that his/her details are always updated
Use Cases
Vaibhav Dilip Ruparel .V. HSBC Bank (The Hong Kong and Shanghai Banking Corporation Ltd.) CC/09/602

The account holder, being the petitioner in the above cited case filed a case against the HSBC Bank complaining that, allegedly the petitioner had requested the bank to withdraw his investments in Liquid -Fund and simultaneously invest it in the income fund to get a higher rate of return. -The bank acted on its first request and withdrew his investment but did not fulfill the second request, as the account of petitioner was not updated. -The petitioner then alleged that his investment if would have been done as requested to the bank could have earned him returns, and his investment was lying idle for 40 days causing him loss, and the same amount he claimed from respondent in his complaint. -The respondent justified its act on the basis that KYC with respect to the account was not updated and therefore the bank did not carry out the second request made by the petitioner.

Jyoti Rajesh Shah V. Integrated Enterprises (India) Ltd. A/10/885 (Filed under Consumer Protection Act 1986.)

The petitioner alleged deficiency in service that she procured from the respondent. She had a Demat account with the respondent, new computerized slips were introduced in 2001 and petitioner alleged that since then, new slips were not made available to her and thus there is deficiency of service on part of the respondent. -The respondent in their defense said that, such slips were delivered to petitioner’s home and slips were sent by courier, apparently the door of the house was locked and hence the petitioner did not receive the slips, and hence there was no deficiency. -Also the respondent in their defense added that, petitioner did not submit PAN Card as part of fulfillment of KYC norms and hence did not comply with KYC and verification of documents. -It was held in this case that petitioner does not come within the purview and definition of the Consumer under Consumer Protection Act 1986, also since petitioner did not comply with KYC norms she had no ground to establish deficiency of service of the respondent.