KYC or “Know your customer” is a regulatory and legal requirement. KYC is important to prevent identity theft, financial fraud, money laundering and terrorist financing. Every Bank has framed a KYC policy by incorporating the directions of RBI such as Customer Acceptance Policy, Customer Identification Procedures, Monitoring of Transactions and Risk management.
The bank collects certain set of documents to verify the identity of the customers to understand their customer at the time of opening an account.
When KYC is Required
KYC is required for the following:
- Opening a bank account
- Availing Locker facility
- Applying for credit card
- Applying for loans
- Changing signatory, nominee
Why KYC is Important for Banks?
KYC is important for banks to understand their customer and their financial dealings to prevent Money Laundering Activities, prevent Terrorist Activities and Benami accounts, which is explained below:
Prevent Money Laundering Activities
Money laundering is the process of transforming the proceeds of crime and corruption into legitimate assets. Anti money laundering provisions contains in Prevention of Money Laundering Act, 2002. KYC guidelines are very important to prevent money laundering. Recently, Rs.6100 crores were remitted abroad from a branch of a public sector bank, wherein RBI observed that current accounts of several entities were opened without fulfilling KYC norms. RBI also stated that proper due diligence was not exercised by the bank. It is important for banks to exercise proper due diligence specially while opening current account which may include visiting the place of business, ensuring genuineness of KYC documents submitted, such as verifying PAN and Aadhar online. Understanding the nature and volume of business of the customer is also important because transactions should allowed based on it for example, a small trader having annual turnover of Rs.5 lacs, depositing Rs.1 crore in account is a suspicious transaction.
Prevent Financing of Terrorism:
One of the major objecive of KYC is to establish the identity of the customer and understanding their business and financial dealings. Without understanding financial dealings of customer, it is not possible to check if there are suspicious transactions, which may actually be going to some terrorist organization.
Prevent Identity Theft:
Without following KYC norms, there is a risk of benami or fictitious account being opened. Benami or fictitious accounts are those accounts which are being opened by one person in the name of an unknown person, who actually does not exists. These accounts are used to evade taxes, park black money or money earned through criminal activities and for money laundering purposes.