Last updated on September 21st, 2023 at 04:44 pm
KYC short for Know Your Customer is a policy set up by every financial institution to identify and monitor each customer and to monitor their financial transactions.
Other words it is how they identify, monitor and make a profile of you based on your transactions in your account. This will help the bank in categorizing customers.
Know Your Customer (KYC)/ Anti Money Laundering (AML)/ Combating of Financing of Terrorism (CFT) guidelines are created to prevent any bank from being used for Money laundering or Terrorism Financing.
KYC Policy
Every bank is creating a KYC policy of their own. But every bank has the following 4 key elements to create a KYC policy.
- Customer Acceptance Policy
- Customer Identification Procedures
- Monitoring of Transactions
- Risk Management
Every Financial institution follows these process to manage all its customers.
1.Customer Acceptance Policy (CAP)
The first part of the KYC process is to accept any person or entity as a customer. The banks can develop CAP process of their own with the following guidelines.
On only satisfying these guidelines bank can accept a person as a customer.
- No Account can be opened in Anonymous or Fictitious Name.
- Basic details of the customer should be perceived like the occupation, income, business activity and turnover from the customer.
- Required documents should be obtained from the customer and should be verified.
- Customer should be cross verified with criminal records and banned entities like terrorist organisation before accepting.
The banks on accepting a person as a customer can create a profile for each customer based on the customer identity, nature of business, social/ financial status.
Note that “The customer acceptance policy should not be too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged.”
2. Customer Identification Procedures
The next step is Customer Identification which simply means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information.
The bank should formulate a specific policy for customer identification process for a customer in different stages like opening account, for making financial/ Non financial transaction,etc.
Banks obtain information that are sufficient to establish to their satisfaction the identity of each new customer irrespective of the nature/status of the people and taking into account the risk perception involved with the customer.
If any Money Laundering or suspicious transaction is identified in the customers account, banks should do the Customer Due Diligence and do the re verification of the details obtained.
The documents required for establishing a Identification of a customer has two distinction
- Proof of Identification
- Proof of Address
The identification required for individual and various entities varies with the type of entity. Banks based on the risk category of the customer and the validity of the documents can request for a re verification of the documents.
3. Monitoring of Transactions
Banks upon identifying the customer status and business can accept a person or entity as a customer.
But banks need to monitor each and every transaction done by the customer. And details of the transaction like source of fund, origin country of the fund and risk factor.
If any irregularities found with the transaction done on the account the same has to be reported to Financial Intelligence Unit- India (FIU-IND).
4. Risk Management
Banks for each customer is expected to ensure that an effective KYC covering proper management oversight, systems and controls, segregation of duties, training and other related matters is put in place by establishing appropriate procedures and ensuring their effective implementation.
Also the customers are categorized based on the business activity and the transaction levels on the customer. The customers are catagorised as Low, Medium and High Risk.
Based on the category the accounts should be reviewed in a periodic intervals not less than six months once.
The Customer profile has to be updated as below based on the risk catagory.
| Risk Catagory | Mandatory KYC Updation |
| Low Risk | Every Ten Years |
| High Risk | Every Eight Years |
| Medium Risk | Every Two Years |
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