July 20, 2024
Home » Understanding Know Your Customer (KYC) Regulations and Practices in the Financial Sector
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This article has been written by Ridhima Raj,4th year BBA LLB. Student of UPES.


Know Your Customer (KYC) refers to the essential procedures and regulatory requirements that financial institutions and other regulated entities must adhere to in order to verify the identities of their clients and gather pertinent information necessary for conducting financial transactions. In the United States, KYC is typically enforced as part of a customer identification program mandated by the Bank Secrecy Act and the USA PATRIOT Act. Globally, KYC policies are growing in significance as they play a crucial role in preventing identity theft, fraudulent activities, money laundering, and the financing of terrorism. Beyond simply matching names, an integral aspect of KYC controls involves closely monitoring a customer’s transactions in relation to their documented profile, account history, and interactions with peers.

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What is KYC?

 Know Your Customer – KYC enables banks to know/ understand their customers and their financial dealings to be able to serve them better.

Who are user of the Bank as a customer?

In accordance with the KYC Policy, a “Customer” is defined as:

1) An individual or organization that manages an account and/or has a working connection with the Bank;

2) The person for whose benefit the account is kept i.e. advantageous owner.

 Procedure of KYC.

Initial client screening is a must for EDD files. This definition necessitates revalidating the client’s identity, i.e., understanding the client’s identity as opposed to who they claim to be. EDD procedures ought to have a tiered strategy depending on the risk.

The dependability of information and information sources, the type and quality of information sources used, and adequately trained analysts who know where to look for information, how to look for it, and how to corroborate, analyse, and decide the results are essential to the integrity of any EDD process. Companies that use open source intelligence, including World Compliance and C6, combine this data and build a complete database every day. Sunil Ch. Das, an estate engineer (civil), from Agartala For instance, different people have various meanings when they search on Google. Experience has revealed that employees who claimed to be experienced but in reality weren’t produced subpar results since they couldn’t locate the necessary data.

 Capability Maturity Model

In 2009 and 2010, a draught KYC Capability Maturity Model was released and distributed to a variety of multinational KYC practitioners. In the beginning of 2011, an updated and peer-reviewed edition will be printed in the ACAMS Today magazine.

 The KYC Maturity Model is based on the usual Capability Maturity Model’s five stages. These levels often have very rigorous definitions and are referred to as Initial, Repeatable, Defined, Managed, and Optimised. Chaotic, Reactive, Proactive, Service Managed, and Value Managed are the new names for the KYC maturity, which has been streamlined, renamed, and re-built. Common manufacturing and IT productivity approaches like Lean, Agile, 6-Sigma, ITIL, and Balanced Scorecard have also been studied and applied to improve processes.

  KYC applies when?

KYC will take place at the following points:

1. creating a brand-new account

2. Opening a second account without submitting the necessary paperwork in accordance with current KYC rules for the first account.

3. Establishing a Locker Facility for those Locker Facility Holders who do not have access to these documents with the bank.

4. When the bank decides that, in light of the account’s behaviour, it is important to get further information from current clients.

5. When beneficial owners, mandate holders, signatories, etc. change. When non-account holders approach the bank for large value one-off transactions, KYC will also be conducted in their case.

  Enhanced Due Diligence.

 A rigorous and robust process of investigation over and above (KYC) procedures, that seeks with reasonable assurance to verify and validate the customer identity understand and test the customers profile, business and account activity; identify relevant adverse information and risk assess the potential for money laundering and / or terrorist financing to support actionable decisions to mitigate against financial, regulatory and reputational risk and ensure regulatory compliance.

Characteristic of Enhanced Due Diligence.

  1. Rigors and robust
  2. Relevant adverse information
  3. Reasonable assurance.

Are the KYC regulations new?

No, KYC standards have always existed, and banks have been collecting KYC documentation in compliance with the guidelines that the RBI occasionally releases. RBI has gone back to the KYC regulations in light of the suggestions given by the FATF’s (Financial Action Task Force) anti-money laundering guidelines principles and guidelines for combating terrorism financing and improved the KYC requirements to meet international standards benchmarks.

For KYC purposes, who is your bank contact person?

The Relationship Manager, or the person who creates your account and communicates with you for transactions, will be your point of contact at the bank.

What would happen if you don’t give the bank the necessary KYC information or documents?

 If you are a potential customer, the Bank has the right to refuse to open the account, and if you are an existing customer, the Bank has the right to end our business connection with you due to your failure to provide KYC information or documentation. However, if you need some time to gather certain non-essential documents, you can speak with the branch or sales personnel. Would you still have to go through the rigorous KYC standards if you were a small depositor? The RBI has streamlined the KYC process with the goal of promoting greater financial inclusion, i.e., providing access to basic banking services to those who intend to maintain balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all of their accounts taken together and the total credit in all of their accounts taken together is not expected to exceed Rupees Fifty Thousand (Rs. Aid us in helping you By being patient when staff asks you to present identification documents, you will help us prevent crime, tax evasion, and the laundering of the proceeds of such crime or evasion. Aid us in helping you By being patient when staff asks you to present identification documents, you will help us prevent crime, tax evasion, and the laundering of the proceeds of such crime or evasion. By keeping your account information and identification documents private, you may further aid in preventing crimes against you and other people. Indian Money Laundering Prevention Regulations – A client must understand The banks are required to report the following under the Prevention of Money Laundering Act (PMLA) 2002 and its Rules:

a) All cash transactions (deposits and withdrawals) of a value greater than Rupees ten lakhs or the equivalent in foreign currency;

 b) All consecutive series of cash transactions that are directly related to one another, valued at less than Rs. 10 lakhs (or the equivalent amount in another currency), that occur within a month and have an aggregate value that is greater than Rs. 10 lakhs.

c) All cash transactions that involved forging, the use of fake currency notes or bank notes as genuine, or the forging of a valued security; d) Any questionable transactions, whether or not they involved cash and went via the channels specified in the Rules.


Banks monitoring KYC for (anti-money laundering AML) and checks pertaining to preventing the Specialized transaction monitoring software is increasingly used in the funding of terrorism (CFT), especially software for analyzing names and tracking trends.

Additionally, Know Your Customer procedures are used by ordinary businesses of all sizes, with the aim of confirming that the agents, consultants, or adherence to anti-bribery laws by distributors. lenders and insurers likewise, export credit organizations are becoming more demanding that clients supply thorough anti-corruption information diligence data, to assess their integrity, and integrity. Specialist consultancies can be helpful. SMEs and multinational corporations both engage in Know You’re when a customer enters a new market.

The implementation of efficient “know-your-customer” Standards are crucial to the risk management of banks.

Practices. Banks with insufficient KYC requirements run the danger of facing serious consequences, including legal and reputational risk, according to the banks’ (CDD) document. In addition to improving a bank’s general safety and soundness, effective KYC policies and processes help safeguard the integrity of the financial system by lowering the possibility that banks may be used for money laundering, terrorist funding, and other illegal activities.

A rigorous and thorough process of investigation above and beyond (KYC) procedures, that seeks with reasonable assurance to verify and validate the customer’s identity; understand and test the customer’s profile, business, and account activity; identify relevant adverse information and risk assess the potential for money laundering and/or terrorist financing to support actionable decisions to mitigate against financial, regulatory, and reputational risk and ensure regulatory compliance.

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