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
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:
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.
KYC process is mandatory to be followed by every financial institution. A customer needs to comply for KYC process in case:
It is important to note that based on norms, financial institutes may ask for a mandatory KYC process in other instances too
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.
Customer Identification Procedure-Creation of Customer Profile/Record
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.
Individuals (Documents acceptable as proof of identity/address)
Any one original document towards proof of identity and proof of address (either permanent or current)
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.
Officers of correspondent banks whose signatures are verifiable through an authorized branch of the Bank.
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.
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.
While the regulatory requirements and expectations for KYC vary by jurisdictions, here are some general guidelines:
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.
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.