Under KYC, financial institutions collect certain important information pertaining to the identity of the client - whether an individual or institutional. This is done in order to increase the legal vigilance so that the cases of fraudulent monetary transactions, money laundering etc., can be minimized.
According to its KYC guidelines in 2002, RBI had directed all the banks to be fully compliant with the KYC norms by 2005. With digital innovations, KYC can be done online as well as in paper mode. Under KYC procedure, the information pertaining to the name, name of spouse and parents, address and its proof, PAN number and Aadhaar details, other valid identity proofs, details of education and profession etc. are collected.
Importance of KYCKYC is very important compliance requirement because it:
1. Establishes the truth and veracity of the customerBanks and other financial institutions enter into business with a multitude of people. As handling sensitive matters related with finance, institutions need to establish the authenticity of the identity of these people - whether individuals or business organizations. KYC helps the institutions collect sufficient proof as to the same purpose.
2. Helps keep track of the transactionsKYC helps financial entities to avoid transactions with persons or organizations involved with corruption, politically exposed persons (PEPs), and those with criminal motives such as terrorist financing and fraud. By following the KYC norms correctly, financial organizations can ensure that their services aren’t misused.
3. Is an important risk management strategyAs the KYC procedure detects the entities with suspicious background early on, it effectively minimizes the instances of money laundering, theft and other monetary fraudulent practices in a sector as sensitive and critical as banking and financial services industry.
Financial institutions, after collecting and verifying this information, send it to the KRAs (KYC Registration Agencies). KRAs upload the same in central database. In the event of any changes in the information in future, only the relevant section is updated.
The following documents are declared as OVDs (Officially Valid Documents) by the Central Government for the purposes of KYC procedure:
- PAN Card
- Aadhaar Card
- Driving License
- Voter’s Identity Card
- NREGA Card
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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