Know Your Customer (KYC) is a mandatory process used by banks and financial institutions to verify the identity of their customers. Its primary objective is to prevent money laundering, terrorist financing, and other financial crimes by ensuring that banks know who their customers are and understand their financial dealings.
Key Components of a KYC Policy
As per RBI guidelines, every bank must have a comprehensive KYC policy that includes these three key elements:
1. Customer Acceptance Policy (CAP)
This defines the criteria for accepting a new customer. The bank must ensure it does not open accounts for anonymous or fictitious names. It sets out the documents and information that will be collected from different categories of customers.
2. Customer Identification Procedures (CIP)
This is the core of the KYC process. It involves verifying the customer’s identity and address through reliable, independent documents, data, or information. This process is also known as Customer Due Diligence (CDD).
The documents required for this are called Officially Valid Documents (OVDs). As per the current guidelines, the six OVDs are:
| Passport | Driving Licence | Voter’s Identity Card | PAN Card | Aadhaar Card | NREGA Job Card |
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For individuals, the bank must obtain both proof of identity and proof of address.
3. Risk Management
Banks must classify their customers into different risk categories based on their profiles and transaction patterns. This allows the bank to apply the appropriate level of due diligence.
- Low-Risk Customers: Salaried employees, government departments. Require basic KYC and less frequent monitoring.
- Medium-Risk Customers: General business customers.
- High-Risk Customers: High Net Worth Individuals (HNIs), Politically Exposed Persons (PEPs), trusts, and customers from high-risk countries. These customers require Enhanced Due Diligence (EDD) and more intensive monitoring.
Periodic Updation of KYC
KYC is not a one-time process. Banks are required to periodically update the KYC records of their customers. The frequency of this updation depends on the customer’s risk category:
- High-Risk Customers: Once every two years.
- Medium-Risk Customers: Once every eight years.
- Low-Risk Customers: Once every ten years.
In essence, KYC is the foundation of a bank’s anti-money laundering measures. By establishing the identity and understanding the financial behavior of their customers, banks can effectively detect and prevent suspicious activities, thereby protecting the integrity of the financial system.