KYC enables banks to know and understand their customers may not misuse banks for their money laundering activities. Moreover, this would help banks to manage risks related to customers.
Elements of KYC norms
Generally, every bank is expected to frame its KYC Norms by taking into account the following elements:
- Customer acceptance policy
- Customer identification procedures
- Monitoring of transactions
- Risk management
- Customer acceptance policy – one of the KYC Norms policies is to lay down customer acceptance policy by every bank. Accordingly, (A) No account should be opened in benamic names or fictitious or anonymous names. (B) There should be clear categories of customers into law, medium and high risk with any suitable nomenclature. (C) Necessary documentation requirements should be complied with depending upon the above perceived risks. (D) In case it is not possible to verify the identity or obtain necessary documents, it is advisable not to open an account or even close an existing.
- Customer identification procedures – the following documents are necessary to establish the identity of individuals: (A) for identity-passport, pan card, voter’s identity card, driving license, etc. (B) for the parliament address – ration card, telephone bill, electricity bill, letter from employer, etc. In the case of limited companies and other corporate, documents like Board Resolution, Certificate of Incorporation, Articles and Memorandum of Association, copy of any utility service bill, etc.
- Monitoring of transaction – KYC Norms also insist upon banks to ensure strict monitoring of transactions. Banks should pay a special attention to transactions that involve large amounts of cash. Generally, banks are expected to maintain proper record of all cash transactions of 10 lakh and above either deposits or withdrawals. Suspicious nature of transactions should be reported to the Controlling Office/Head Office immediately.
- Risk management – banks may apply monetary limits based on the nature and type of the account. Clear-cut responsibility should be fixed for strict implementation of KYC norms. The internal auditors should check whether KYC norms and procedures are strictly followed and lapses, if any should be brought to light immediately.