KYC (Know Your Customer) and AML (Anti-Money Laundering) are among the most consistently tested topics in bank promotion exams — from Clerk to Scale V. Every banker deals with KYC in daily operations, which means exam questions go beyond definitions into scenarios: when to apply Enhanced Due Diligence, when to file an STR, what documents to accept, how to handle PEPs. This article covers everything from the legal framework to the 2025 amendments.

The legal framework — three layers

Layer	Law / Direction	Governs
1 — Primary law	Prevention of Money Laundering Act (PMLA), 2002 (in force from 2005)	Defines money laundering offence, obligations of reporting entities, FIU-India mandate, penalties
2 — Rules	PMLA (Maintenance of Records) Rules, 2005 (last amended July 2024)	Specific record-keeping obligations — CTR, STR, retention periods, beneficial ownership thresholds
3 — RBI directions	RBI Master Direction on KYC (updated periodically — last amended June 2025)	CDD procedures, risk categorisation, OVDs, periodic update cycles, digital KYC modes, CKYCR

What is money laundering?

Money laundering is the process of making illegally obtained funds (proceeds of crime) appear legitimate by passing them through a series of transactions. Under PMLA, it involves three stages:

• Placement: Introducing illegal money into the financial system (e.g., depositing cash from drug sales)
• Layering: Concealing the origin through complex transactions (transfers, shell companies, foreign accounts)
• Integration: Merging the cleaned money back into the legitimate economy (buying property, businesses)

Customer Due Diligence (CDD) — the core of KYC

CDD is the process banks use to verify who their customers are, understand what they do, and assess the risk they present. Under the RBI Master Direction, CDD has four elements:

• Identify and verify the customer’s identity using Officially Valid Documents (OVDs)
• Identify and verify the beneficial owner (the person who ultimately controls the customer)
• Understand the purpose and intended nature of the business relationship
• Conduct ongoing monitoring — scrutinise transactions against the customer’s risk profile

Officially Valid Documents (OVDs)

The following documents are recognised as OVDs for KYC purposes:

• Passport
• Driving licence
• Proof of possession of Aadhaar number (Aadhaar card / e-Aadhaar)
• Voter ID (Elector’s Photo Identity Card)
• NREGA Job Card — signed by a State Government officer and bearing the applicant’s photograph
• Letter issued by the National Population Register (NPR)

Note: PAN card alone is not an OVD — it is proof of identity but does not establish address. PAN or Form 60 must be obtained separately for tax-related purposes.

Risk categorisation of customers

Banks must classify every customer into a risk category and apply the appropriate level of due diligence:

Risk Category	Who falls here	Due diligence level	Periodic KYC update
Low risk	Salaried employees of regulated entities, government employees, pensioners — known income source, standard transactions	Simplified CDD	Every 10 years
Medium risk	Businesses with known trade activity, resident individuals with moderate transaction volumes	Standard CDD	Every 8 years
High risk	PEPs, non-face-to-face customers, customers from high-risk jurisdictions, shell companies, trusts, NGOs	Enhanced Due Diligence (EDD)	Every 2 years

Politically Exposed Persons (PEPs)

PEPs are individuals entrusted with prominent public functions — ministers, senior government officials, senior judiciary, armed forces officials, senior executives of state-owned enterprises, important political party officials. Family members and close associates of PEPs are also treated as PEPs.

For PEPs, banks must: obtain senior management approval before opening the account; establish the source of wealth and source of funds; conduct enhanced ongoing monitoring. PEPs remain high-risk even after they leave public office — for a period determined by the bank’s risk assessment.

Beneficial ownership — 2024 amendment (important change)

The beneficial owner is the natural person who ultimately owns or controls the customer, or on whose behalf a transaction is conducted. The RBI Master Direction amendment of November 2024 (aligned with PMLA Rules amendment of July 2024) lowered the beneficial ownership threshold:

Type of customer	Old threshold	New threshold (from Nov 2024)
Companies	25% shareholding	10% shareholding
Partnership firms	15% capital/profits	10% capital/profits
Trusts	15% interest	10% interest/benefit

If no natural person meets the threshold (e.g., no single shareholder holds 10%), the senior managing official of the entity is treated as the beneficial owner.

Modes of KYC (digital options)

Mode	How it works
Physical / In-person KYC	Customer visits branch; original OVDs verified; certified copies retained
Aadhaar e-KYC	Biometric or OTP-based authentication via UIDAI; paperless and instant; customer consent required
V-CIP (Video Customer Identification Process)	Live video call with bank official; face matching, document capture, geolocation verified; no branch visit needed
DigiLocker	Customer shares documents stored in DigiLocker with the bank via consent; digitally signed by issuing authority
CKYC (Central KYC)	CKYCR — Central KYC Records Registry (managed by CERSAI); KYC done once shared across all financial institutions; unique 14-digit KYC identifier issued

UCIC — Unique Customer Identification Code

Banks must assign a UCIC to each customer. If an existing customer with a completed KYC record opens a new account or avails additional services at the same Regulated Entity, a fresh CDD is not required — the existing KYC record applies. This was formalised in the November 2024 amendment.

AML reporting obligations

FIU-India — the reporting authority

FIU-India (Financial Intelligence Unit — India) is under the Ministry of Finance. It receives, processes, analyses, and disseminates financial intelligence to law enforcement agencies. All banks and financial institutions are Reporting Entities (REs) under PMLA and must file reports with FIU-India.

Report type	Trigger	Filing deadline
Cash Transaction Report (CTR)	Single cash transaction or aggregate of cash transactions in a month exceeding ₹10 lakh	By 15th of the succeeding month
Suspicious Transaction Report (STR)	Any transaction (regardless of amount) that gives grounds for suspicion of money laundering or financing of terrorism	Within 7 working days of forming suspicion
Non-Profit Organisation Transaction Report (NTR)	Transactions by NPOs / NGOs above prescribed threshold	By 15th of the succeeding month
Cross-Border Wire Transfer Report (CWTR)	All cross-border wire transfers of ₹5 lakh and above (or equivalent in foreign currency)	By 15th of the succeeding month

Key record retention requirements

• KYC records and CDD documents: Retain for 5 years after the business relationship ends
• Transaction records: Retain for 5 years from the date of transaction
• STR records: Retain for 5 years from the date of filing

Small / Basic Savings Account — Simplified KYC

For financial inclusion purposes, RBI allows opening of accounts with limited KYC (Simplified Measures). Key features of such accounts:

• Account balance at any point should not exceed ₹50,000
• Total credits in a year should not exceed ₹1 lakh
• Total withdrawals/transfers should not exceed ₹10,000 per month
• No foreign remittances credited
• Full KYC must be completed within 24 months for the account to continue

Exam one-liners — KYC & AML

Test yourself — MCQs on KYC & AML

Frequently Asked Questions

What is the difference between KYC and AML?

KYC (Know Your Customer) is the process of identifying and verifying a customer’s identity, understanding their business, and assessing the risk they present. AML (Anti-Money Laundering) is the broader framework of controls to detect, prevent, and report money laundering — of which KYC is one component. KYC is the preventive front-end; AML includes ongoing monitoring, STR/CTR reporting, and investigations.

What is the CTR threshold and when must it be filed?

A Cash Transaction Report (CTR) must be filed with FIU-India for any cash transaction — or aggregate of cash transactions in a month — exceeding ₹10 lakh (or equivalent in foreign currency). The CTR must be filed by the 15th of the month following the transaction. Both deposits and withdrawals above ₹10 lakh trigger CTR.

What documents are Officially Valid Documents (OVDs) for KYC?

Six documents qualify as OVDs under the RBI Master Direction on KYC: Passport, Driving licence, Proof of possession of Aadhaar number, Voter ID (EPIC), NREGA Job Card (with photograph, signed by State Government officer), and letter issued by the National Population Register. PAN card is not an OVD but must be obtained separately for accounts above certain thresholds.

What is the beneficial ownership threshold after the 2024 amendment?

Following the PMLA Rules amendment of July 2024 and the RBI Master Direction amendment of November 2024, the beneficial ownership threshold was revised to 10% for all entities — companies (down from 25%), partnership firms (down from 15%), and trusts (down from 15%). A beneficial owner is the natural person who ultimately owns or controls more than 10% of the entity.

How often must KYC be updated for high-risk customers?

High-risk customers (including PEPs, non-face-to-face customers, customers from high-risk jurisdictions) must have their KYC updated every 2 years. Medium-risk customers require updates every 8 years and low-risk customers every 10 years. Banks may carry out KYC updates through non-face-to-face channels (V-CIP, email confirmation) for low and medium risk customers.

Who is FIU-India and what is its role?

FIU-India (Financial Intelligence Unit — India) operates under the Ministry of Finance. It is the national agency for receiving, processing, analysing, and disseminating information relating to suspect financial transactions. All banks, NBFCs, and other reporting entities under PMLA must file CTRs, STRs, and other reports with FIU-India. FIU-India then shares intelligence with law enforcement agencies like the ED, CBI, and income tax authorities.

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Disclaimer: KYC guidelines and AML thresholds are updated by RBI periodically. This page reflects the position as of June 2025 (latest RBI Master Direction amendment). Always verify current thresholds and reporting requirements from the latest RBI circular before your promotion exam.