[sbinews] 'Know Your Customer' (RBI Website)

  • From: "Rajendra S. Pai" <rspai9@xxxxxxxxx>
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Thu, 6 May 2004 20:52:33 -0700 (PDT)

Know Your Customer
(RBI Website) 

As part of ?Know Your Customer? (KYC) principle, the
Reserve Bank has issued several guidelines relating to
identification of depositors and advised 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. The Reserve Bank has
also from time to time advised banks to be vigilant
while opening accounts for new customers to prevent
misuse of the banking system for perpetration of
frauds. With a view to safeguarding banks from being
unwittingly used for transfer or deposit of funds
derived from criminal activity (both in respect of
deposit and borrowal accounts), or for financing of
terrorism, the Reserve Bank has consolidated its
extant instructions on the subject. The guidelines are
also applicable to foreign currency
accounts/transactions. The consolidated instructions
are :

KYC Policy

For New Accounts

"Know Your Customer" (KYC) procedure should be the key
principle for identification of an
individual/corporate opening an account. The customer
identification should entail verification through an
introductory reference from an existing account
holder/a person known to the bank or on the basis of
documents provided by the customer.

Banks? Board of Directors should put in place adequate
policies that establish procedures to verify the
bonafide identification of individual/corporates
opening an account. The Board should also have in
place policies that establish processes and procedures
to monitor transactions of suspicious nature in
accounts and have systems of conducting due diligence
and reporting of such transactions.

Customer Identification : The objectives of the KYC
framework should be two fold, (i) to ensure
appropriate customer identification and (ii) to
monitor transactions of a suspicious nature. Banks
should obtain all information necessary to establish
the identity/legal existence of each new customer,
based preferably on disclosures by customers
themselves. Easy means of establishing identity would
be documents such as passport, driving license, etc.
Where such documents are not available, verification
by existing account holders or introduction by a
person known to the bank may suffice. It should be
ensured that the procedure adopted does not lead to
denial of access to the general public for banking

For Existing Customers : Banks are expected to have
adopted due diligence and appropriate KYC norms at the
time of opening of accounts in respect of existing
customers. In case of any omission, the requisite KYC
procedures for customer identification should be
completed at the earliest.

Cash Transactions

Banks are required to issue travellers cheques, demand
drafts, mail transfers and telegraphic transfers for
Rs.50,000 and above only by debit to customers?
accounts or against cheques and not against cash.
Applicants (whether customers or not) should furnish
permanent (income tax) account number (PAN) on the
application for issue of travellers cheques, demand
drafts, mail transfers and telegraphic transfers if
the amount exceeds Rs. 50,000.

Banks are required to keep a close watch of cash
withdrawals and deposits for Rs.10 lakh and above in
deposit, cash credit or overdraft accounts and keep
record of details of these large cash transactions in
a separate register.

Banks? branches are required to report all cash
deposits and withdrawals of Rs.10 lakh and above as
well as transactions of suspicious nature with full
details in fortnightly statements to their controlling
offices. Controlling offices are also required to
apprise their head offices regarding transactions of
suspicious nature.

Risk Management

In order to check possible abuse of banking channels
for illegal and anti-national activities, the Board
should clearly lay down a policy for ensuring
adherence to the requirements as under :

Internal Control Systems : Duties and responsibilities
should be explicitly allocated for ensuring that
policies and procedures are managed effectively and
that there is full commitment and compliance to an
effective KYC programme in respect of both existing
and prospective deposit accounts. Banks? controlling
offices should periodically monitor strict adherence
to the laid down policies and procedures by the
officials at the branch level.

Terrorism Finance : The Reserve Bank has been
circulating lists of terrorist entities notified by
the Government of India to banks so that banks may
exercise caution if any transaction is detected with
such entities. There should be a system at the branch
level to ensure that such lists are consulted in order
to determine whether a person/ organisation involved
in a prospective or existing business relationship
appears on such a list. The authority to whom banks
may report accounts suspected to belong to terrorist
entities would be advised in consultation with the

Internal Audit/Inspection

An independent evaluation of the controls for
identifying high value transactions should be carried
out on a regular basis by the internal audit function
in banks.

Concurrent/internal auditors must specifically
scrutinise and comment on the effectiveness of the
measures taken by branches in adoption of KYC norms
and steps towards prevention of money laundering. Such
compliance report should be placed before the audit
committee of the bank?s board at quarterly intervals.

Identification and Reporting of Suspicious
Transactions : Banks should ensure that branches and
controlling offices report transactions of suspicious
nature to the appropriate law enforcement authorities
designated under the relevant laws governing such
activities. There should be well laid down systems for
freezing of accounts as directed by such authority and
reporting the matter to the controlling office and
head office. Being matters of sensitive nature, there
must be quarterly reporting of such aspects to the
audit committee of the board or the board of

Adherence to FCRA, 1976

Banks should adhere to the instructions on the
provisions of the Foreign Contribution Regulation Act
(FCRA), 1976 cautioning them to open accounts or
collect cheques only in favour of associations which
are registered under the Act by the Government of
India. A certificate stating that the association is
registered with the Government of India should be
obtained from the concerned association at the time of
opening of the account or collection of cheques.

Banks should advise their branches to exercise due
care to ensure compliance and desist from opening
accounts in the name of banned organisations and those
without requisite registration.


Financial intermediaries should prepare and maintain
documentation on their customer relationships and
transactions to meet the requirements of relevant laws
and regulations, to enable any transaction effected
through them to be reconstructed. In the case of wire
transfer transactions, the records of electronic
payments and messages must be treated in the same way
as other records in support of entries in the account.
All financial transactions records should be retained
for at least five years after the transaction has
taken place and should be available for perusal and
scrutiny of audit functionaries as well as regulators
as and when required.


Banks must have an ongoing training programme so that
staff are adequately trained for their roles and
responsibilities as appropriate to their hierarchical
level in complying with anti-money laundering
guidelines and for implementing KYC policies

R.S.Pai, Web Address: http://rspai.tripod.com

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