INTRODUCTION

What Is Know Your Client (KYC)

The Know Your Client or Know Your Customer is a standard in the investment industry that
ensures investment advisors know detailed information about their clients' risk tolerance,
investment knowledge, and financial position. KYC protects both clients and investment
advisors. Clients are protected by having their investment advisor know what investments
best suit their personal situations. Investment advisors are protected by knowing what they
can and cannot include in their client's portfolio. KYC compliance typically involves
requirements and policies such as risk management, customer acceptance policies, and
transaction monitoring.

Definition of KYC

Know Your Customer is the process of verifying the identity of customer. The objective of
KYC guidelines is to prevent banks from being used, by criminal elements for money
laundering activities. It also enables banks to understand its customers and their financial
dealings to serve them better and manage its risks prudently.

Importance of KYC

KYC is the means of identifying and verifying the identity of the customer through
independent and reliance source of documents, data or information. For the purpose of
verifying the identity of:
- Individual customers, bank will obtain the customer’s identity information, address and
recent photograph. Similar information will also have to be provided for joint holders and
mandate holders.
- Non-Individual customers – banks will obtain identification data to verify the legal status
of the entity, operating address, the authorized signatories and beneficial owners.
Information is also required on the nature of employment/business that the customer does
or expects to undertake and the purpose of opening of the account with the bank.
Purpose

The KYC guidelines have been put in place by the Reserve Bank of India in the context of the
recommendations made by the Financial Action Task Force (FATF) on Anti Money
Laundering (AML) standards and on Combating Financing of Terrorism (CFT). The Prevention
of Money Laundering Act requires banks, financial institutions and intermediaries to ensure
that they follow certain minimum standard of KYC and AML.

Periodicity of KYC refresh

KYC is to be provided at the time of opening a new account as well as refresh. It may be
necessary to obtain additional information from existing customers based on the conduct of
the account, where there are changes to the account or at fixed periodic refresh cycles
based on the risk categorization of the customer. Similarly, an existing customer will be
required to provide fresh KYC for new account opening to adhere to the latest applicable
KYC standards.

Contact Person in the bank

As a customer of the bank, you will need to liaise with your Relationship Manager or the
bank staff that initiated your account opening.

Failure to provide KYC

Banks are entitled to refuse to open an account or discontinue an existing relationship if
there is failure to meet the minimum KYC requirements. However, there is flexibility
provided to certain categories of customer who are unable to provide the necessary
document at the time of account opening.
Objectives of the study

 The KYC (Know Your Customer) is one of the banking regulations that the banks and
other financial institutions are required to perform to identify their customers. It is
done in order to obtain their clients’ relevant information before entering into doing
a financial business with them.
 Money laundering has quickly become a growing threat to the banking industry as it
not only poses a serious issue to the integrity of the economic system but also the
financial stability and safety of the countries.
 In India, the PMLA (Prevention of the Money Laundering Act) was passed in 2002
and it has been in line with the FATF (Financial Action Task Force) recommendations
in 2009.
 Banks are being comprehensively sensitized about the concealment and updated
KYC norms. As such, before 2002, the banks in India were advised to follow certain
customer identification processes for the opening of accounts and monitoring all the
transactions with the aim to report them to the appropriate authorities
 To ensure appropriate customer identification and monitor transaction of suspicious
nature
Review of Literature
Know-your-customer (KYC) due diligence is an essential element of banking, including
correspondent banking. Customer due diligence is applied by all banks providing a service in the
correspondent banking chain to the institutions or customers with which they directly interact.
This section focuses on the KYC activities performed by correspondent banks on their
respondent banks (KYC activities performed by respondent banks on their customers are not
specific to correspondent banking and are not covered in this section).

Customer due diligence requires that correspondent banks identify and understand their
respondents’ banking activities and know if the respondents maintain additional correspondent
banking relationships.15 This process often leads to a massive exchange of documents.
According to SWIFT, the 7,000 banks that use the SWIFT network for correspondent banking
have more than 1 million individual relationships, so the number of documents exchanged is
presumably much higher

This setup creates several problems: first, the same or very similar information needs to be sent
to all correspondents; second, correspondents may have differing information requirements, as
this is a risk-based process that is not standardised. Finally, it has to be taken into account not
only that information is exchanged at the outset of a relationship, but that continuous updates
are necessary. As a result, the KYC due diligence process is complex, costly, time-consuming and
labour-intensive.

To improve this situation, several providers have developed or are developing KYC utilities, with
the aim of storing customer due diligence information in a single repository. These utilities may
help correspondent banks to identify and mitigate the risks associated with respondent banks.
Respondent banks would access such a utility to provide the initial information and then provide
updates as necessary in line with a standardised template, whereas correspondent banks would
access it to retrieve the necessary information. Information-providing banks (respondents)
maintain full control over their data and determine which banks have access to it.

The use of KYC utilities would provide several advantages:

(i) the number of times a bank must send the same information could be greatly reduced;

(ii) the accuracy and consistency of the information could improve, as banks would maintain
only one set of updated information;

(iii) the use of a single template might promote the standardisation of the information that
banks provide to other institutions as a starting point for KYC obligations;

(iv) the use of a central KYC utility might speed up the process; and

(v) costs could be reduced thanks to a lesser amount of documentation being exchanged. In
view of this, authorities may wish to promote the use of KYC utilities.

Banks’ costs could be further reduced if they were able to place more reliance on KYC utilities so
that they could undertake fewer checks of the quality of data held in the utilities. One way to
achieve this might be to establish some form of independent standard to set out what systems
and controls such utilities should have to ensure that the data they hold are accurate and to
facilitate some form of external accreditation process to test compliance with this standard. It is
unlikely that central banks could do this