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What is KYC and why does it matter?

You probably have gotten the calls from the Bank to update your KYC. If you got accounts in multiple banks. You probably are fed up with the KYC update calls. But, what is KYC and why does it matter?

Meaning of KYC

Self-sovereign identity successfully trialed for KYC in UK regulatory sandbox - Ledger Insights - enterprise blockchainKYC means Know Your Customer, the name alone defines what it means. It is a policy developed globally to know and understand the customers which helps the bank to prevent identity theft, financial fraud, money laundering, and terrorist financing.

KYC is a regulatory and legal requirement and KYC policies are framed by respective banks incorporating the key elements following the Nepal Rastra Bank such as :

a) Customer Acceptance Policy

b) Customer Identification Procedures

c) Monitoring of Transactions

d) Risk Management

The process of KYC entails identifying and verifying the customers through the customer screenings if they are blacklisted or banned by the country. The KYC form requires the customer to fill up the personal details such as name, birthdate, family names up to three generations, present address, permanent address, marital status, religion, occupation, and so on. The customers are also required to draw the location map of their residence and estimated transaction plans for the account.

What are the required documents for KYC?

  • You need a recent PP-sized photo and photocopy of your citizenship card.
  • In the case of foreign nationals, you’d require an attested copy of your passport certificate.
  • For salaried employees, copy of valid employee ID card.
  • For minors,  You need to fill two KYC forms, one for minors and one for guardians. You’d require a recent PP-sized photo of the minor and guardian, the Birth certificate of the minor, and the Citizenship of the guardian.
  • In the case of Indian nationals, a Recommendation letter from the Indian embassy, any documents from India such as adhar card or voters card.

Why KYC matter?

Keep Your Compliance: The Fintech's Guide to KYC - trimplement blog

KYC matters to prevent from following :

  • Identity theft

The banking sector has been facing a lot of identity theft. Identity theft simply means pretending to be someone else and doing transactions under others’ identities. The Customer Identification Program under KYC policy requires banks to take the appropriate steps to have the reasonable belief that all customers who enter a formal banking relationship with them are who they say they are. This involves the collection of documents that show proof of identity (government-issued IDs), establishing and verifying customer identity, and screening the identity information against political exposure, sanction lists, criminal lists, and unreliable customer lists. A bank must understand a customer’s profile and how they will be using their accounts, assess the risks of the customer’s profile, and monitor the transactions performed by the customer and ensure they align with expected behavior.

  • Money laundering 

The first step in the money laundering process for criminals is to get their money into an account with a Bank, often using a false identity and address. The funds so deposited will be transferred to other accounts locally or abroad or used for buying goods or services. These transactions would appear to be like any legally earned money and becomes difficult to trace back to its criminal past. Thus, KYC helps in verifying the customer’s identity and also screens the customer if they are blacklisted by the country.

  • Terrorist Financing

Terrorist Financing is an act committed by any person who in any manner, directly or indirectly provides or collects, supports to do so, in order to use them or knowing that these funds would be used in whole part for the execution of a terrorist act.KYC helps to prevent terrorist financing as the customer screening under KYC would help the bank to find out if the customer is blacklisted by the country.

  • Financial fraud

KYC helps in minimizing the financial fraud as the full detail of the customer is available to the bank which can be used for the police investigation. The bank requires KYC update for the financial transactions and would suspend or even block the account if the KYC is not updated. The bank requires updated KYC in the following :

  • Opening a new account.(deposit/ borrowal )
  • Opening a subsequent account where documents as per current KYC standards not submitted
    while opening the initial account
  • Opening a locker facility where these documents are not available with the bank for all locker
    facility holders.
  • When the bank feels it is necessary to obtain additional information from existing customers
    based on the conduct of the account.
  • After periodic intervals based on instructions received from RBI.
  • When there are changes to signatories, mandate holders, beneficial owners, etc

WHEN TO UPDATE/REVIEW KYC?

Update and review of a customer are based on the risk of the customer. The high risked customers will be required to update their KYC every year. The medium risk customers are required to update once in three years and low-risk customers are required to update once in five to eight years.

High risks customers are legally convicted, corrupted, and PEPS. The medium-risk customers are usually the ones with no income sources such as minors, housewives, students, and unemployed people. The low-risk customers are the ones with income sources such as salaried people and businessmen.

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