What is KYC?
The popularly used acronym, KYC stands for Know Your Customer. KYC is also referred to as Know Your Client alternatively. The term KYC is frequently used in the ‘Banking’ industry these days. The title suggests the meaning itself and indicates towards its main objective very clearly that ‘Know Your Customer’ refers to a formal process of ‘knowing’ or identifying your customer in a complete manner, which enables the bank or any such organization to keep complete information regarding the customer. KYC does not only exists in the banking industry but many other similar financial organizations/companies/businesses. ‘KYC’ is a basic customer identity verification process that lets the concerned organization keep a check on its customers and ensure their authenticity before they initiate any kind of mutual business.
The process of KYC involves obtaining information of the customers that includes all their personal details with attached proofs, which works as an authentication of the customer’s activities and assures the respective bank/organization about a clean record of that client/customer.
Origin of KYC
Banks in particular are compulsorily supposed to follow the KYC guidelines and undertake the process whenever they open a new bank account. KYC laws were initially instigated in the year 2001 as a part of the ‘Patriot Act’ which got passed in the aftermath of the 9/11 incident. The main motive behind passing the KYC laws was to provide ways to discourage or dissuade terrorist activities.
‘Patriot Act’ is an Act of Congress which was introduced by US President George Bush on October 26, 2001, which was focused on curbing terrorism. The complete title of the act is – the Act’s full title is “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism”. These laws were always in the pipeline, but due to the 9/11 attacks, they gained speed and finally came to exist in a strong manner including India.
The ‘Patriot Act’ makes it very clear that if a bank has any doubts about suspicious activity, it should file a ‘suspicious activity report’ right away.
Purpose of KYC
As the title suggests, the meaning of KYC is ‘Knowing Your Customer / Knowing Your Client’ in a bank or a business company respectively. The main objectives/purpose behind initiating the process of KYC are:
- KYC ensures that the bank/company will not be misused or taken advantage of by some miscreants or defaulters through money laundering activities.
- KYC procedure also helps an organization/company to better understand the financial activities or dealings of its customers/clients.
- KYC also helps to keep a check, if the customers/clients of any organization are not involved in any kind of money-related crimes and can assess the risk before signing any customer.
- KYC helps in curbing ‘corruption’, restricting illegal activities like terrorist financing, money laundering & identity theft.
According to a report, more than 1.7 million suspicious activity reports were filed with the Financial Crimes Enforcement Network, in 2014, which was 35 percent more than in 2013.
KYC Procedure
The process of KYC typically includes few important steps that act as a control over fraudulent and money-laundering activities. The important steps in a KYC procedure are as follows:
- Collection of basic personal information, that includes attachment of identity proofs.
- Matching the names in the proposed customer list with the existing known ones ( E.g. politically exposed persons, PEP)
- Risk analysis of the prospective customer (chances of a customer committing money laundering activities).
- Creating an expected customer transaction trajectory.
- Monitoring of the customer’s financial dealings based on the expected created pattern.
A KYC policy is usually formed keeping these four pointers in mind:
- Customer Acceptance Policy;
- Customer Identification Procedures;
- Monitoring of Transactions;
- Risk management.
KYC Requirements
We constantly come across this acronym KYC, usually in the banking sector, where it is most frequently and widely used. It is, therefore, beneficial to know about the KYC procedure in banks.
While opening a new bank account, a customer generally needs the following documents:
- Proof of Identity
- Proof of Address
- A recent photograph
The documents that are generally accepted as proofs of identity are :
- Passport
- PAN Card
- Voter’s Identity Card
- Driving License
- Photo identity proof of Central or State government
- Ration card with photograph
- Letter from a recognized public authority or public servant
- Bank Pass Book bearing photograph
- Employee identity card of a listed company or public sector company
An applicant would be required to submit any one of these documents like identity proof and address proof respectively. If the identity proof also contains your address details, then it will also be considered as address proof.
Documents accepted as address proof:
- Utility bills like telephone bill, electricity bill, gas bill, Passport
- Bank account statement received by mail or courier along with signature verification by the Banker
- Ration card
- Letter from employer, bank manager of scheduled commercial banks.
While submitting the application, a bank / financial organization may ask the customer to either produce self-attested documents or attested by any government authority/ gazetted officer.
Except while opening a bank account, KYC can be required while opening a Demat account, stock trading account, or an FD in another bank. If you want to open another account in the same bank where you already have opened one which is KYC compliant, in that case, you don’t have to complete the KYC procedure again.
e-KYC
Apart from the regular KYC procedure that we need to follow in banks and other financial organizations, there is e-KYC also available which is a paperless method of authentication. e-KYC refers to the Electronic Know Your Customer process. In simple words, e-KYC eliminates the paperwork and enables a fast and secure KYC process. E.g, If you want to open a new bank account, you just need to step in with your Aadhaar number and get your fingerprint scanned and all your stored information will appear. Aadhar based e-KYC is an easy, swift, and most widely used verification method.
KYC Implementation
These days KYC procedure is not only limited to banks and some specific financial organizations but other online platforms and businesses also require a KYC verification process to avoid any suspicious activities. Among other online mobile wallets, Paytm, MobiKwik, Amazon Pay are few such popular online applications that have made KYC procedure mandatory for any transaction to be made through it. If you do not update your KYC details, you will be restricted from using the basic wallet services.
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