There is no escaping the paperwork while investing in financial products. Be it, opening a new bank account, demat account or buying insurance, filling the Know Your Client (KYC) documents is a mandatory procedure today.

KYC is a client identification program that verifies and maintains records of the identity and address of investors. All this data can get confusing, but heading to a site like understandingdata.com can help you to get your head around it all.

KYC norms were introduced in 2002 by the Reserve Bank of India (RBI). It directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account. The purpose was to prevent money laundering, terrorist financing, theft and so on. Today other regulators too have made KYC mandatory. The Securities and Exchange Board of India (Sebi) has mandated it for mutual funds and broking accounts, the Insurance Regulatory Development Authority (IRDA) while buying insurance and the Forwards Markets & Commission (FMC) for commodity trading. You need to submit it even for making post office deposits.

When KYC is required?
KYC has to be followed by every financial institute while dealing with customers. KYC procedure needs to be adhered to by a customer during following instances:

• While opening an account in a bank
• While applying for a credit card or loan
• While opening a subsequent account
• Opening a locker facility
• When there are not enough documents with the bank in existing account
• When there are changes in signatories, beneficial owners, etc
• When the bank feels it necessary to obtain additional information from existing customers based on conduct of the account
• While investing in a mutual fund
• Financial institutes may ask for a mandatory KYC process in other instances too

According to the KYC policy, a “Customer” is-

• A person or entity that maintains an account and/or has a business relationship with the bank
• One on whose behalf the account is maintained (i.e. the beneficial owner);
• Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
• Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

What are the KYC requirements for opening a bank account?

To open a bank account, one needs to submit a ‘proof of identity and proof of address’ together with a recent photograph.

Documents to be given as ‘proof of identity’ and ‘proof of address’?

The Government of India has notified six documents as ‘Officially Valid Documents (OVDs) for the purpose of producing proof of identity. These six documents are:

• Passport,
• Driving Licence,
• Voters’ Identity Card,
• PAN Card,
• Aadhaar Card issued by UIDAI and
• NREGA Card.

You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then it would be accepted as as ‘proof of address’. If the document submitted by you for proof of identity does not contain address details, then you will have to submit another officially valid document which contains address details.

What does KYC control?

• Collection and analysis of basic identity information (“Customer Identification Program” or CIP)
• Name matching against lists of known parties
• Determination of the customer’s risk in terms of propensity (A propensity to do something or a propensity for something is a natural tendency that you have to behave in a particular way.) to commit money laundering, terrorist finance, or identity theft
• Creation of an expectation of a customer’s transactional behavior
• Monitoring of a customer’s transactions against their expected behavior and recorded profile as well as that of the customer’s peers.

Would it be possible, if I do not have any of the officially valid documents, to have a bank account, which is not subjected to any limitations as in the case of ‘small accounts’?

A normal account can be opened by submitting a copy of any one of the following documents:

(i) Identity card with person’s photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions;

or

(ii) letter issued by a gazetted officer, with a duly attested photograph of the person.

This, however, is not a general rule and it is left to the judgement of the banks to decide whether this simplified procedure can be adopted in respect of any customer.

Impact for service providers

Companies and distributors say, KYC requirements have burdened them with substantial administrative obligations. The verification rules place a financial burden on banks, insurance companies and mutual funds due to the involved costs. Currently, every entity has to individually conduct this verification which results in duplication of effort for customers as well as the institutions.

There is a need to simplify KYC requirements . The authorities could opt for centralisation of the KYC norms to make investing easy for those not well versed with paperwork. Mutual funds have done this at an industry level by giving the mandate to a single entity, CDSL Ventures.

A uniformity in requirements for KYC prescribed by all authorities would help make the filing easier. One important document that will make life simpler is – ‘Aadhar’, the unique identification number to be provided to each citizen by Unique Identification Authority of India (UIDAI), a government initiative.

Please Note

• Banks are required to classify the customers into ‘low’, ‘medium’ and ‘high’ categories depending on their AML risk assessment.
• If you do not provide the required documents for KYC, the bank may not be able to open your account.
• Aadhaar card is now accepted as a proof of both, identity and address.
• If you have opened an account with a bank, which is KYC compliant, then for opening another account with the same bank, furnishing of documents is not necessary.
• Full KYC exercise is necessary for Credit/Debit/Smart/for purchaser of Gift Cards and also in respect of add-on/ supplementary cards.
• KYC exercise needs to be done for all those who want to make domestic remittances of Rs. 50,000 and above and all foreign remittances
• Banks are required to periodically update KYC records. This is a part of their ongoing due diligence on bank accounts. The periodicity of such updation would vary from account to account or categories of accounts depending on the bank’s perception of risk. Periodical updation of records also helps prevent frauds in customer accounts.
• KYC is required to be done at least every two years for high risk customers, at least every eight years for medium risk customers and ten years for low risk customers. This exercise would involve all formalities normally taken at the time of opening the account.
• If you do not provide your KYC documents at the time of periodic updation bank has the option to close your account. Before closing the account, the bank may, however, impose ‘partial freezing’ (i.e. initially allowing all credits and disallowing all debits while giving an option to you to close the account and take your money back). Later even all credits also would not be allowed. The ‘partial freezing’ however, would be exercised by the bank after giving you due notice.

e-KYC

e-KYC refers to electronic KYC. e-KYC is possible only for those who have Aadhaar numbers. While using e-KYC service, you have to authorise the Unique Identification Authority of India (UIDAI), by explicit consent, to release your identity/address through biometric authentication to the bank branches/business correspondent BC). The UIDAI then transfers your data comprising name, age, gender, and photograph of the individual, electronically to the bank/BC. Information thus provided through e-KYC process is permitted to be treated as an ‘Officially Valid Document’ under PML Rules and is a valid process for KYC verification.

References:
Rediff Articles
Reserve Bank of India
Axis Bank