KYC and AML
AML refers to all efforts involved in preventing money laundering, such as stopping criminals from becoming customers and monitoring transactions for suspicious activity. KYC refers to customer identification and screening, and ensuring you understand their risk to your business.
Know Your Customer (KYC)
KYC refers to customer identification and screening.
KYC means Know Your Customer and sometimes Know Your Client. KYC or KYC check is the mandatory process of identifying and verifying the client's identity when opening an account and periodically over time.
As part of ‘Know Your Customer’ (KYC) principle, RBI has issued several guidelines relating to identification of depositors and advised the banks to put in place systems and procedures to help control financial frauds, identify money laundering and suspicious activities, and for scrutiny/monitoring of large value cash transactions.
Know Your Customer in banking (KYC) is today a significant element in the fight against financial crime and money laundering, and customer identification is the most critical aspect as it is the first step to better perform in the other stages of the process.
Banks may refuse to open an account or halt a business relationship if the client fails to meet minimum KYC requirements
KYC procedures defined by banks involve all the necessary actions to ensure their customers are real, assess, and monitor risks.
These client-on boarding processes help prevent and identify money laundering, terrorism financing, and other illegal corruption schemes.
KYC process includes ID card verification, face verification, document verification such as utility bills as proof of address, and biometric verification.
Banks must comply with KYC regulations and anti-money laundering regulations to limit fraud.
KYC documents
KYC checks are done through an independent and reliable source of documents, data, or information. Each client is required to provide credentials to prove identity and address.
When a corporate company opens a new account, it will have to provide Social Security numbers and copies of a photo ID and passports for its employees, board members, and shareholders.
Instructions have also been issued by the RBI from time to time advising banks to be vigilant while opening accounts for new customers to prevent misuse of the banking system for perpetration of frauds.
Anti-Money Laundering (AML)
AML refers to all efforts involved in preventing money laundering, such as stopping criminals from becoming customers and monitoring transactions for suspicious activity.
RBI has directed banks to follow certain customer identification procedures to open accounts and monitor suspicious transactions.
Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These ‘Know Your Customer’ guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Detailed guidelines based on the Recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision, with indicative suggestions wherever considered necessary, have been issued. Banks have been advised to ensure that a proper policy framework on ‘Know Your Customer’ and Anti-Money Laundering measures with the approval of the Board is formulated and put in place.
The Master Circular of RBI aims at consolidating all the instructions/guidelines issued by RBI on Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards. The Master Circular has been placed on the RBI website (http://www.rbi.org.in).
The instructions, contained in the master circular, are applicable to all Financial Institutions and all the scheduled commercial banks excluding RRBs. The said guidelines shall also apply to the branches and majority owned subsidiaries located abroad, especially, in countries which do not or insufficiently apply the FATF Recommendations, to the extent local laws permit. When local applicable laws and regulations prohibit implementation of these guidelines, the same should be brought to the notice of Reserve Bank. In case there is a variance in KYC/AML standards prescribed by the Reserve Bank and the host country regulators, branches/overseas subsidiaries of banks are required to adopt the more stringent regulation of the two.
These guidelines are issued under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.
Download: KYC RBI Circular