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Saturday, February 23, 2013

What is KYC ("Know" Your Customer)


Background
The main purpose of KYC norms was to restrict money laundering and terrorist financing when it was introduced in late the 1990s in the United States. The US government turned very strict after 9/11 and all regulations were finalized before 2002 for KYC.Taking a leaf out of the US book, the Reserve Bank of India (RBI) too directed all banks to implement KYC guidelines for all new accounts in the 2nd half of 2002.

What is KYC?
In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.
This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof.

Mandatory details required under KYC norms are proof of identity and proof of address. Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof of residence can be a ration card, an electricity or telephone bill or a letter from the employer or any recognized public authority certifying the address.
Some banks may even ask for verification by an existing account holder. Though the standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted, which differ from bank to bank.

Other aspects of KYC
To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBI has given various directives to banks:
(1) Strengthening the banks' 'Internal Control System' by allocating duties and responsibilities clearly, and periodically monitoring them.
(2) Before giving any finance at branch level, making sure that the person has no links with notified terrorist entities and reporting any such 'suspect's' accounts to the government.
(3) Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC guidelines are being properly adhered to or not by banks.
(4) Most important, banks must keep an eye out for all banking transactions and identify suspicious ones. Such transactions will be immediately reported to the bank's head office and authorities and norms shall also be laid down for freezing of such accounts.
(5) KYC is not centralized across all agencies e.g. it is a separate for SEBI, Banks, Gas agencies etc..e.g. Applicants must be KYC compliant while investing with any SEBI registered funds, applying for gas connections or opening a new bank account
(6) KYC does not get expired. Once the KYC Acknowledgement is obtained and informed to a Mutual Fund, it will be registered against the folio and quoted in all future account statements. The same will exist in perpetuity, unless cancelled by CVL.
(7) KYC is done free of cost.

How to obtain KYC
Different agencies have established different mechanism to obtain KYC. e.g. to obtain KYC with SEBI (e.g. for buying mutual funds or opening a new mutual fund account), The Association of Mutual Funds of India (AMFI) has facilitated a centralized platform through CDSL Ventures Limited ("CDSL"), a wholly owned subsidiary of Central Depository Services (India) Limited, to carry out the KYC procedure on behalf of all Mutual Funds. CVL through its Points of Service (PoS) will accept KYC Application Forms, verify documents and provide the KYC Acknowledgement (across the counter on a best effort basis). The list of PoS will be displayed on the websites of Mutual Funds, CDSL and AMFI. Once the KYC is duly completed in all regards, the investor needs to produce a copy of the acknowledgement when investing for the first time with a Mutual Fund. There is no need to repeat the KYC process individually for each mutual fund.

Getting your KYC is a mandatory step in getting prepared to get into the equity market. The earlier you do it, the better for you.

Cheers

Manoj Arora

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