Verifying a customer’s identification is the process commonly called “Know Your Customer,” or KYC in abbreviated form. The goal of the KYC regulations is to stop criminal elements from using banks for their money-laundering schemes, while simultaneously assessing their clients’ financial conditions.

All financial institutions and intermediaries are required to complete the KYC procedure before starting any financial transaction for a customer under the Prevention of Money Laundering Act, 2002 (PMLA).

The Reserve Bank of India ordered all financial – banking and non-banking entities in the nation to implement KYC procedures.

Thus, KYC has become an integral part of every customer’s onboarding process in a financial institution.

What is KYC?

By gathering information on their customers’ identities as part of a KYC procedure, businesses ensure that the financial services regulations set forth by the government are not being abused or violated.

• The main goal ofKYC is to stop fraud and money laundering by preventing criminal elements from using financial services for their purposes.
• Additionally, it helps financial service providers better understand their clients’ financial situations, allowing them to provide better services.
• It also helps financial institutions become better decision-makers and offer smart services to control risks while lending.

Starting the KYC process

Organizations must gather and validate basic information about clients, such as their names and authorized signature, as part of the KYC process.

When a bank consumer requests to open an account, the KYC process begins. To maintain the security of the data, banks must also routinely update the KYC information for their clients.

Banks and other financial institutions must follow specific client identification processes when creating new accounts, and they must also keep an eye out for questionable activity to report it to the appropriate authorities.

Requirement of these regulations

• These regulations aim to stop criminal groups from using banks and financial institutions for money laundering.
• Additionally, they prevent the financial institution’s money from being channelled into terrorist financing schemes, whether on purpose or accidentally.

Implications of the KYC check

When a customer contacts a banking institution for a product or service, its first course of action is always to do a KYC check.

• If the inquiry is successful, the bank will also have access to the customer’s credit history, which is provided by credit rating organizations like CIBIL or Experian, in addition to their name, phone number, email address, and permanent address.
• In essence, a successful KYC inquiry gives you a comprehensive understanding of the customer’s background and past financial history. Thus the bank can market and provide their services and goods more effectively.

However, KYC has other benefits as well.

Advantages of KYC- You Need to Know

The advantages of KYC are:

• It enables banks to quickly access and evaluate the client’s financial history in terms of assets and liabilities so that they can properly conduct a risk assessment.
• It gives banks the ability to successfully decrease their vulnerability to fraud by precisely confirming the client’s identification assertion.
• It prevents you from taking part in terrorist and money-laundering operations.
• It lowers the overall risk of banks’ lending portfolio, which helps to directly increase their profit margins.

Documents Needed to Support the KYC Process

Although the precise paperwork needed to support the KYC process varies depending on the jurisdiction, some of the key elements always need to be present. These are listed below.

• Proof of residency in the form of utility bills and official identity papers
• Aadhar Card, and Driver’s License as Identity Proof
• Using credit reports, PAN cards, and ITR filings as evidence of income
• Job verification with MGNREGA cards or Offer Letters

Since all or most of these credentials are related to one another in most developed economies, the KYC framework performs cross-reference checks on them in an effort to confirm the customer’s claim of identity.

Customer Identification Program

According to the Customer Identification Program, banks and other financial institutions must take the necessary efforts to have a reasonable belief that every customer they accept into a formal banking relationship is who they claim to be.

The “know your customer” program is another name for the CIP.

Customer Due Diligence

Information from customer due diligence comprises details about a customer that allows a company to judge the degree to which the consumer exposes the institution to various risks.

Money laundering and financing terrorism are examples of these concerns.

The complex process of KYC involves gathering identification documents (government-issued IDs), establishing and verifying the customer’s identity, and screening the customer’s identity information for political exposure, inclusion on sanction lists, criminal records, and lists of unreliable customers.

A bank must comprehend a customer’s profile and how they intend to use their accounts. A KYC helps them evaluate the risks associated with that profile, and monitor the customer’s transactions to make sure they conform to anticipated behaviour.

Customer acceptance policy

Every bank should create a clear customer acceptance policy that specifies the requirements for accepting customers. No account may be opened using a false identity or one that is anonymous.

If a bank is unable to get the necessary documents or conduct an identity check, it cannot open an account. In such situations, a bank may likewise think about terminating an existing account.

It is significant to emphasise that the adoption of the client acceptance policy and its execution should not be overly restrictive, as this could prevent those who are economically or socially disadvantaged from receiving banking services.

Customer identification

The next step is customer identification, which entails starting an account-based relationship while performing client due diligence. This entails locating and authenticating the client via one of the officially recognized documents.

Banks should obtain one certified copy of an “officially valid document” with the customer’s name, address, and recent photo to open accounts for individuals. They should also obtain any other necessary documents about the customer’s financial situation.

For ‘low-risk’ clients, banks are permitted to take simplified measures and accept a few other documents.

Continuous monitoring

Effective KYC procedures must include continuous monitoring.

The transactions must be carefully examined by the banks to make sure they match the customer’s profile and funding source.

The level of surveillance will vary depending on the account’s risk categorization, with high-risk accounts being subject to more intense monitoring.

To guarantee that the transactions are consistent with their knowledge of the clients, their company, and their risk profile, banks should continuously undertake due diligence concerning the commercial relationship with each client.

The Board of Directors should design appropriate processes and oversee their efficient implementation to ensure that an effective AML/CFT program is in place.

Conclusion

There are many reasons why KYC is important in banks and for multiple financial services meted out by financial institutions. The general significance of KYC standards in banks aids in building client trust, enables the bank to comprehend the nature of customer actions, and protects against fraud.

Additionally, it standardised the onboarding process, which makes it simpler to monitor customer behaviour according to their risk profile, and it helps decrease the risk associated with money laundering.