What is KYC
Know Your Customer, popularly known as KYC, is an industry practise whereby financial institutions and banks verify their customers’ identity. This helps banks, credit companies, and other institutions ensure that their clients are not involved in fraudulent activities like corruption, bribery, or money laundering.
Since 2004, KYC has been mandatory for all banks, financial institutions and any other digital payment companies who carry out financial transactions.
Importance of KYC
The KYC procedure (as laid out by RBI) helps financial institutions ensure that their customers are real and do not pose any risk of identity theft, money laundering, and terrorism financing. KYC checks are put in place to prevent a number of crimes like tax evasion, price fixing, embezzlement, cyber crime, bribery, antitrust violations, hacking, etc. RBI’s annual report states that in FY20, bank frauds of Rs 100,000 and above have more than doubled in value to Rs 1.85 lakh crores. This figure was Rs 71,500 crores in FY19. In this light, KYC is increasingly becoming important.
Types of KYC
KYC is fundamentally of two types – in-person and e-KYC.
In-Person KYC: This type of KYC is carried out offline. Customers visit a KYC kiosk or the institution itself and validate their identity using Aadhaar biometrics and other original documents. Some of these documents include:
- For identity proof
- Unique Identification Number (UID) such as Aadhaar, Passport, Driving license and Voter ID card
- PAN card
- Identity card or document with your photo, which is issued by any Statutory/Regulatory Authorities, Central/State Government and their Departments
- For address proof
- Passport, Voters Identity Card, Registered Sale or Lease Agreement of Residence, Ration Card, Driving License, Insurance Copy or Flat Maintenance bill
- Utility bills such as Landline Telephone Bills, Gas bill or Electricity bill (not more than three months old)
- Bank Account Statement or Passbook entries (not more than three months old)
- Self-declaration by the Supreme Court and High Court judges, which specify their new address
With the emergence of the COVID pandemic, in-person KYC has become difficult to perform. For the safety of people, it is now replaced with e-KYC, which is done remotely.
E-KYC: Nowadays, electronic KYC (e-KYC) is the norm. It offers many ways to onboard consumers. Electronic KYC is carried out by AI-powered, machine learning-based modules that incorporate liveness detection technologies to verify customers’ identities. A few methods include geotagging, OCR, V-CIP, V-IPV, and video KYC. These options are now being offered by many KYC solutions for effortless onboarding and verification.
Although norms may vary across countries, most elements of a KYC process are the same. Generally, a KYC process comprises of:
- Verification of the customer’s identity
- Investment suitability
- Due diligence on documents like the address proof and income proof
- Customer identification
Some of the basic information required for customer identification includes:
- Date of birth
- Identification number
- Tax Number
- Investment Experience
- Investment Preferences
- Income and Assets
- Customer Due Diligence
In the investment industry, one of the important aspects of KYC requirements depends on being able to trust the investor. Customer Due Diligence is performed to determine this.
KYC Remediation refers to the process through which companies/organisations collect their clients’ information through KYC, conduct a risk assessment, and create their KYC customer profile. KYC remediation helps an organisation have organised and straightforward information and risk assessments about their clients. It ensures that the clients are following all the necessary rules and regulations. It helps companies in highlighting the highest risk elements associated with each client.