What is the KYC process and why is it mandatory?

Know Your Customer (KYC) processes are critical for banks and financial services firms to enable them to evaluate customer risk. The KYC process is a legal requirement globally with current Anti Money Laundering (AML) laws.

An effective KYC process requires the bank and financial institution to verify a customer’s identity, understand their financial activities (verification that the source of the customer’s funds is legal), and any risk that they might present.

The principal objective of the KYC process is to guard against financial institutions being used for money laundering. The KYC process helps firms gain an in-depth understanding of their customers and their financial dealings to better manage the firm’s risks.

KYC requirements in India are mandated by the Prevention of Money Laundering Act (PMLA), 2002. The stipulated KYC procedures are listed in the PML rules document.

Aadhaar-based electronic KYC (eKYC) now helps banks and financial services firms in India to electronically confirm the identity of their clients.

Banks and financial institutions are expected to block any business relationship with prospective clients if the clients do not satisfy stipulated KYC verification requirements.

Why is a KYC process required?

When opening a bank account, demat account, or before you invest in mutual funds or stocks, you need to comply with the KYC process. KYC processes have been mandated to fight financial fraud, money laundering, and terror financing. Most countries impose stiff penalties for non-compliance with KYC stipulations.

How is the KYC process implemented?

The KYC process consists of three distinct steps:

  • Individuals need to have their identities verified. Individuals need to provide proof of identity (name), date of birth, address, and UID (Aadhaar) number.
  • Depending on the type of account or financial services sought, the bank or financial institution will conduct due diligence to establish the authenticity of the information provided by a prospective client.
  • The client’s KYC is monitored in a continuous and ongoing manner by checking unusual spikes in transactions, suspicious across-the-border activities, matching the nature of transactions to the stated purpose, etc.

Is the KYC process required for corporate accounts too?

Yes, the KYC process for corporate accounts is similar to that for individuals. The only difference is that the processes are more involved. The related processes are sometimes also referred to as Know Your Business (KYB). The KYB process verifies company details, establishes ownership structure, and firmly identifies business owners.

What is electronic KYC (eKYC)?

Wherever possible, digital processes are employed in the KYC process to improve speed, increase accuracy, reduce cost for the bank and the customers, make the system adaptable to changing regulatory requirements and improve overall efficiency.

Evolving technological developments such as mobile technologies, biometric sensors, AI technologies, etc., are increasingly being used for due diligence and ongoing monitoring so that you can conveniently invest in stocks or mutual funds.

How does online Know Your Customer work?

In the online KYC system, customers are first required to fill an online KYC registration form. Next, the customer is asked to validate the information provided in the online form with relevant supporting documentation. The uploaded documents are verified, necessary data extracted and the process is completed.

Where digital or electronic means of KYC documents collection and verification are not available, the entire process is conducted offline with physical copies of all KYC forms and documents.