Banks and financial institutions are required to follow certain customer identification procedures for the opening of accounts and monitor transactions of suspicious nature for the purpose of reporting them to appropriate authorities. These guidelines are in the form of Know Your Customer, Anti-Money Laundering and Combating Financing of Terrorism regulations.
The objective of these guidelines is to prevent banks and financial institutions from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to understand their customers and their financial dealings better which in turn helps them manage their risks prudently.
Every bank should develop a clear customer acceptance policy laying down explicit criteria for the acceptance of customers. No account shall be opened in an anonymous or fictitious name.
Banks cannot open an account when it is unable to verify the identity or obtain required documents. A bank can also consider closing an existing account under similar circumstances.
It is important to note that the adoption of the customer acceptance policy and its implementation should not be too restrictive resulting in the denial of banking facility to people who are financially or socially disadvantaged.
Next comes customer identification, which means undertaking client due diligence measures while commencing an account-based relationship. This includes identifying and verifying the customer on the basis of one of the officially valid documents.
For opening accounts of individuals, banks should obtain one certified copy of an ‘officially valid document’ containing details of identity and address, one recent photograph and other documents pertaining financial status of the customer as may be required.
Banks are allowed to adopt ‘simplified measures’ and accept certain other documents in respect of ‘low risk’ customers.
Continuous monitoring is an essential element of effective KYC procedures. Banks are expected to closely examine the transactions to ensure that they are consistent with the customer’s profile and source of funds. The extent of monitoring will depend on the risk category of the account with high-risk accounts subjected to intensified monitoring.
Banks should exercise continuous due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge about the clients, their business and risk profile.
The Board of Directors should ensure that an effective AML/CFT programme is in place by establishing appropriate procedures and ensuring their effective implementation.
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