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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
What is KYC, why it is required, what are the different KYC procedures?
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11:37:29 AM, 26th December, 2018
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
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    The full form of KYC is Know Your Customer. It may seem an annoyance for many investors, but the requirement is quite justified if we know why it is required. Let us dive in.



    WHY KYC ?

    The requirement of KYC arises from stopping illegally obtained money entering the financial system. KYC procedures were created based on based on Prevention of Money-Laundering Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.



    WHICH ENTITIES REQUIRE KYC ?

    As per RBI guidelines, all Regulated Entities (REs) need to follow KYC procedures. The REs are:

    1. Banks - all Scheduled Commercial Banks/ Regional Rural Banks / Local Area Banks / All Primary (Urban) Co-operative Banks /State and Central Co-operative Banks and any other entity which has been licensed under Section 22 of Banking Regulation Act, 1949, which as a group shall be referred.

    2. All India Financial Institutions (AIFIs)

    3. All Non-Banking Finance Companies (NBFC, Miscellaneous Non-Banking Companies (MNBCs) and Residuary Non-Banking Companies (RNBCs).

    4. All Payment System Providers (PSPs)/ System Participants (SPs) and Prepaid Payment Instrument Issuers (PPI Issuers).

    5. All authorised persons (APs) including those who are agents of Money Transfer Service Scheme (MTSS), regulated by the Regulator.



    KYC PROCEDURES

    The entities (REs) mentioned above need to KYC policy which include the following:

    Customer Acceptance Policy.
    Risk Management.
    Customer Identification Procedures (CIP).
    Monitoring of Transactions.
    Customer Due Diligence Procedures (CDD)


    Here, we will discuss the procedures relevant to individual depositors and investors.



    1. Customer Acceptance Policy:

    While this policy is to be framed by the entity, the general requirements are

    No account can be opened in anonymous, fictitious/benami name or where the entity is unable to carry out customer due diligence (CDD) procedures.

    No transaction or any other account based relationship can happen without the aforementioned due dulligence.

    The due diligence is carried out for join account holders as well.

    Persons appearing on the sanctioned list of RBI needs to be identified.

    This poily should not prohibit anyone banking or financial services members of the general public, especially those, who are financially or socially disadvantaged.


    2. Customer Identification Procedure (CIP):

    Customer identification is required at following scenarios:

    a. Starting an account based relationship with a customer.

    b. International money transfer by a person who is not an account holder.

    c. When here is a doubt about the customer identification data provided.

    d. When the entity is selling third party products as agents, selling their own products, payment of dues of credit cards/sale and reloading of prepaid/travel cards and any other product for more than rupees fifty thousand.

    e. Transactions for non-account holder for Rs. 50,000 or more in one transaction or several connected transactions.

    f. When the entity has doubts that the customer (account holder or not) is intentionally structuring transactions to be below Rs. 50,000.


    Entities can accept CIP done by third parties, subject to some conditions.



    3. Customer Due Diligence (CDD) Procedure

    The following documents are required to be provided by the individual who is opening an account or is the beneficial owner, authorised signatory or the power of attorney holder related to any legal entity:


    a. If the individual has Aadhar, then Aadhar, PAN or form 60 as defined in the Income-tax Rules, 1962.

    If Aadhar is not available, then proof of application to Aadhar (not older than 6 months) needs to be provided. If a PAN is not submitted, then certified copy of an ‘Officially Valid Document’ (OVD )containing details of identity and address and one recent photograph needs to be submitted.


    b. If a person is not eligible for Aadhar or a non-resident, then followings needs to be provided:

    i. PAN or form 60 as defined by the Income Tax act.
    ii. Recent photograph.
    iii. Certified copy of an OVD containing details of identity and address.


    c. If the Aadhar and PAN card does not mention the current address, an OVD can be provided.

    d. The entity needs to, with customer consent , carry out e-KYC authentication (biometric or OTP based) or Yes/No authentication based on the Aadhar information provided based on some conditions.

    e. A customer eligible for Aadhar or PAN does not submit the documents, the customer needs to submit such documents within 6 months. Otherwise the account will cease to be operational.

    f. Existing account holders, except in the states of Jammu and Kashmir or Assam or Meghalaya, will have to submit Aadhar and PAN as per guidelines of the Central Government.

    g. Account opening using OTP based e-KYC can be done, but with the specific consent of the customer, the account balance needs to be lower than Rs. 1 lakh, the aggregate of all credits needs to be lower than Rs. 2 lakh and some other limitations,


    Readers can refer to the link mentioned below for more information.




    Related Link:
    https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10292&Mode=0

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