KYC AML :: (Short notes 1)
1. The objective of KYC/AML/CFT guidelines is to prevent banks/FIs from being used,
intentionally or unintentionally, by criminal elements for money laundering or terrorist
financing activities.
2. The PMLA came into effect from 1st July 2005. Necessary Notifications / Rules under the
said Act were published in the Gazette of India on 1st July, 2005 by the Department of
Revenue, Ministry of Finance, Government of India. The PMLA has been further amended
vide notification dated March 6, 2009 and inter alia provides that violating the prohibitions
on manipulative and deceptive devices, insider trading and substantial acquisition of
securities or control as prescribed in Section 12 A read with Section 24 of the Securities and
Exchange Board of India Act, 1992 (SEBI Act) will now be treated as a scheduled offence
under schedule B of the PMLA.
3. KYC procedures also enable banks/FIs to know/understand their customers and their
financial dealings better and manage their risks prudently.
4. For the purpose of KYC Norms, a ‘Customer’ is defined as a person who is engaged in a
financial transaction or activity with a reporting entity and includes a person on whose
behalf the person who is engaged in the transaction or activity, is acting.
5. “Designated Director" means a person designated by the reporting entity (bank, financial
institution, etc.) to ensure overall compliance with the obligations imposed under chapter IV
of the PML Act.
6. In terms of PML Act a ‘person’ includes: (i) an individual, (ii) a Hindu undivided family, (iii) a
company, (iv) a firm, (v) an association of persons or a body of individuals, whether
incorporated or not, (vi) every artificial juridical person, not falling within any one of the
above persons (i to v), and (vii) any agency, office or branch owned or controlled by any of
the above persons (i to vi).
7. “Transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the
arrangement thereof and includes- (i) opening of an account; (ii) deposits, withdrawal,
exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment
order or other instruments or by electronic or other non-physical means; (iii) the use of a
safety deposit box or any other form of safe deposit; (iv) entering into any fiduciary
relationship; (v) any payment made or received in whole or in part of any contractual or
other legal obligation; or (vi) establishing or creating a legal person or legal arrangement.
8. Banks/FIs should frame their KYC policies incorporating the following four key elements: (i)
Customer Acceptance Policy (CAP); (ii) Customer Identification Procedures (CIP); (iii)
Monitoring of Transactions; and (iv) Risk Management.
9. Documents and other information to be collected from different categories of customers
depending on perceived risk and the requirements of PML Act, 2002 and
instructions/guidelines issued by Reserve Bank from time to time.
10. Customer Identification Procedure (CIP) : Customer identification means undertaking client
due diligence measures while commencing an account-based relationship including
identifying and verifying the customer and the beneficial owner on the basis of one of the
OVDs
11. Customer Due Diligence requirements (CDD) while opening accounts
12. introduction is not necessary for opening of accounts under PML Act and Rules or the
Reserve Bank’s extant instructions, banks/FIs should not insist on introduction for opening of
bank accounts.
13. Small Accounts If an individual customer does not possess either any of the OVDs or the
documents applicable in respect of simplified procedure (as detailed at paragraph 2.3
above), then ‘Small Accounts’ may be opened for such an individual. A ‘Small Account'
means a savings account in which the aggregate of all credits in a financial year does not
exceed rupees one lakh; the aggregate of all withdrawals and transfers in a month does
not exceed rupees ten thousand and the balance at any point of time does not exceed
rupees fifty thousand. A ‘small account’ maybe opened on the basis of a self-attested
photograph and affixation of signature or thumb print.
14. a small account shall be opened only at Core Banking Solution (CBS) linked branches or in a
branch where it is possible to manually monitor and ensure that foreign remittances are not
credited to the account and that the stipulated monthly and annual limits on aggregate of
transactions and balance requirements in such accounts are not breached, before a
transaction is allowed to take place;
15. a small account shall remain operational initially for a period of twelve months, and
thereafter for a further period of twelve months if the holder of such an account provides
evidence before the banking company of having applied for any of the officially valid
documents within twelve months of the opening of the said account, with the entire
relaxation provisions to be reviewed in respect of the said account after twenty four
months.
16. Where a customer categorised as low risk expresses inability to complete the
documentation requirements on account of any reason that the bank considers to be
genuine, and where it is essential not to interrupt the normal conduct of business, the bank
may complete the verification of identity within a period of six months from the date of
establishment of the relationship.
17. Procedure to be followed in respect of foreign students : Banks should follow the following
procedure for foreign students studying in India: 1) Banks may open a Non Resident
Ordinary (NRO) bank account of a foreign student on the basis of his/her passport (with visa
& immigration endorsement) bearing the proof of identity and address in the home country
together with a photograph and a letter offering admission from the educational institution
in India. 2) Banks should obtain a declaration about the local address within a period of 30
days of opening the account and verify the said local address. 3) During the 30 days period,
the account should be operated with a condition of allowing foreign remittances not
exceeding USD 1,000 or equivalent into the account and a cap of monthly withdrawal to Rs.
50,000/-, pending verification of address. 4) The account would be treated as a normal NRO
account, and will be operated in terms of instructions contained in the Reserve Bank of
India’s instructions on Non-Resident Ordinary Rupee (NRO) Account. Students with Pakistani
and Bangladesh nationality will need prior approval of the Reserve Bank for opening the
account.
18. Where the customer is a company, one certified copy each of the following documents are
required for customer identification: (a) Certificate of incorporation; (b) Memorandum and
Articles of Association; (c) A resolution from the Board of Directors and power of attorney
granted to its managers, officers or employees to transact on its behalf and (d) An officially
valid document in respect of managers, officers or employees holding an attorney to
transact on its behalf.
19. Where the customer is a partnership firm, one certified copy of the following documents is
required for customer identification: (a) registration certificate; (b) partnership deed and (c)
an officially valid document in respect of the person holding an attorney to transact on its
behalf.
20. Where the customer is a trust, one certified copy of the following documents is required for
customer identification: (a) registration certificate; (b) trust deed and (c) an officially valid
document in respect of the person holding a power of attorney to transact on its behalf.
21. Where the customer is an unincorporated association or a body of individuals, one certified
copy of the following documents is required for customer identification: (a) resolution of the
managing body of such association or body of individuals; (b) power of attorney granted to
transact on its behalf; (c) an officially valid document in respect of the person holding an
attorney to transact on its behalf and (d) such information as may be required by the
bank/FI to collectively establish the legal existence of such an association or body of
individuals.
22. Proprietary concerns: (1) For proprietary concerns, in addition to the OVD applicable to the
individual (proprietor), any two of the following documents in the name of the proprietary
concern are required to be submitted: (a) Registration certificate (b) Certificate/licence
issued by the municipal authorities under Shop and Establishment Act. (c) Sales and income
tax returns. (d) CST/VAT certificate. (e) Certificate/registration document issued by Sales
Tax/Service Tax/Professional Tax authorities. (f) Licence/certificate of practice issued in the
name of the proprietary concern by any professional body incorporated under a statute. (g)
Complete Income Tax Return (not just the acknowledgement) in the name of the sole
proprietor where the firm's income is reflected, duly authenticated/acknowledged by the
Income Tax authorities. (h) Utility bills such as electricity, water, and landline telephone bills.
23. When the client accounts are opened by professional intermediaries: When the bank has
knowledge or reason to believe that the client account opened by a professional
intermediary is on behalf of a single client, that client must be identified. Banks may hold
'pooled' accounts managed by professional intermediaries on behalf of entities like mutual
funds, pension funds or other types of funds. Banks, however, should not open accounts of
such professional intermediaries who are bound by any client confidentiality that prohibits
disclosure of the client details to the banks.
24. Where funds held by the intermediaries are not co-mingled at the bank and there are 'sub-
accounts', each of them attributable to a beneficial owner, all the beneficial owners must be
identified. Where such funds are co-mingled at the bank, the bank should still look into the
beneficial owners. Where the banks rely on the 'customer due diligence' (CDD) done by an
intermediary, they should satisfy themselves that the intermediary is a regulated and
supervised entity and has adequate systems in place to comply with the KYC requirements of
the customers. It should be understood that the ultimate responsibility for knowing the
customer lies with the bank.
25. Beneficial ownership :When a bank/FI identifies a customer for opening an account, it
should identify the beneficial owner(s) and take all reasonable steps in terms of Rule 9(3) of
the PML Rules to verify his identity, as per guidelines provided below:
(a) Where the client is a company, the beneficial owner is the natural person(s), who,
whether acting alone or together, or through one or more juridical person, has/have a
controlling ownership interest or who exercises control through other means.
Explanation- For the purpose of this sub-clause- 1. “Controlling ownership interest” means
ownership of/entitlement to more than 25 per cent of the shares or capital or profits of the
company. 2. “Control” shall include the right to appoint majority of the directors or to
control the management or policy decisions including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements.
(b) Where the client is a partnership firm, the beneficial owner is the natural person(s),
who, whether acting alone or together, or through one or more juridical person, has/have
ownership of/entitlement to more than 15 per cent of capital or profits of the partnership.
(c) Where the client is an unincorporated association or body of individuals, the beneficial
owner is the natural person(s), who, whether acting alone or together, or through one or
more juridical person, has/have ownership of/entitlement to more than 15 per cent of the
property or capital or profits of the unincorporated association or body of individuals.
(d) Where no natural person is identified under (a), (b) or (c) above, the beneficial owner is
the relevant natural person who holds the position of senior managing official.
(e) Where the client is a trust, the identification of beneficial owner(s) shall include
identification of the author of the trust, the trustee, the beneficiaries with 15% or more
interest in the trust and any other natural person. exercising ultimate effective control over
the trust through a chain of control or ownership.
(f) Where the client or the owner of the controlling interest is a company listed on a stock
exchange, or is a subsidiary of such a company, it is not necessary to identify and verify the
identity of any shareholder or beneficial owner of such companies.
26. KYC exercise should be done at least every two years for high risk customers, every eight
years for medium risk customers and every ten years for low risk customers. Such KYC
exercise may include all measures for confirming the identity and address and other
particulars of the customer that the bank/FI may consider reasonable and necessary based
on the risk profile of the customer, taking into account whether and when client due
diligence measures were last undertaken and the adequacy of data obtained.
27. Freezing and closure of accounts :
(i) In case of non-compliance of KYC requirements by the customers despite repeated
reminders by banks/FIs, banks/FIs may impose ‘partial freezing’ on such KYC non-compliant
accounts in a phased manner.
(ii) During the course of such partial freezing, the account holders can revive their accounts
by submitting the KYC documents as per instructions in force.
(iii) While imposing ‘partial freezing’, banks/FIs have to ensure that the option of ‘partial
freezing’ is exercised after giving due notice of three months initially to the customers to
comply with KYC requirements to be followed by a reminder giving a further period of three
months.
(iv) Thereafter, banks/FIs may impose ‘partial freezing’ by allowing all credits and
disallowing all debits with the freedom to close the accounts.
(v) If the accounts are still KYC non-compliant after six months of imposing initial ‘partial
freezing’ banks/FIs should disallow all debits and credits from/to the accounts thereby,
rendering them inoperative.
(vi) Further, it would always be open to the bank/FI to close the account of such customers
after issuing due notice to the customer explaining the reasons for taking such a decision.
Such decisions, however, need to be taken at a reasonably senior level. In the circumstances
when a bank/FI believes that it would no longer be satisfied about the true identity of the
account holder, the bank/FI should file a Suspicious Transaction Report (STR) with Financial
Intelligence Unit – India (FIU-IND) under Department of Revenue, Ministry of Finance,
Government of India.
28. At-par cheque facility availed by co-operative banks : Some commercial banks have
arrangements with co-operative banks under which the latter open current accounts with
the commercial banks and use the cheque book facility to issue ‘at par’ cheques to their
constituents and walk-in- customers for effecting their remittances and payments. Since the
‘at par’ cheque facility offered by commercial banks to co-operative banks is in the nature of
correspondent banking arrangement, banks should monitor and review such arrangements
to assess the risks including credit risk and reputational risk arising there from. For this
purpose, banks should retain the right to verify the records maintained by the client
cooperative banks/ societies for compliance with the extant instructions on KYC and AML
under such arrangements.
29. In this regard, Urban Cooperative Banks (UCBs) are advised to utilize the ‘at par’ cheque
facility only for the following purposes:
(i) For their own use.
(ii) For their account holders who are KYC complaint provided that all transactions of
Rs.50,000/- or more should be strictly by debit to the customer’s account.
(iii) For walk-in customers against cash for less than Rs.50,000/- per individual. In order to
utilise the ‘at par’ cheque facility in the above manner, UCBs should maintain the following:
(i) Records pertaining to issuance of ‘at par’ cheques covering inter alia applicant’s name and
account number, beneficiary’s details and date of issuance of the ‘at par’ cheque. (ii)
Sufficient balances/drawing arrangements with the commercial bank extending such facility
for purpose of honouring such instruments. UCBs should also ensure that all ‘at par’ cheques
issued by them are crossed ‘account payee’ irrespective of the amount involved.
30. Simplified norms for Self Help Groups (SHGs) : KYC verification of all the members of SHG
need not be done while opening the savings bank account of the SHG and KYC verification of
all the office bearers would suffice. As regards KYC verification at the time of credit linking of
SHGs, no separate KYC verification of the members or office bearers is necessary
