What is KYC?
The full form of KYC is “Know Your Customer.” It is a process used by financial institutions such as banks to verify the identity of their customers. Hence it is aptly called “Know Your Customer.” The strategy to combat financial fraud, terrorist financing, and money laundering. It is to ensure compliance with various laws and regulations. These include India’s Prevention of Money Laundering Act (PMLA) and the Foreign Exchange Management Act (FEMA).
The History of Financial Laws in India – KYC Edition
The origins of KYC lie in dangerous crimes, including but not limited to terrorist financing. International KYC regulations are to prevent these activities and help the financial institutions, such as banks, impacted by them. KYC, or Know Your Customer is a law that India too has.
In the early 2000s, the Reserve Bank of India made it compulsory for all Indian financial institutions to verify customer details. These included the identity and address of all customers carrying out financial transactions. KYC, known as Know Your Customer, was introduced by the RBI as the only mode for this verification. As mentioned, it prevents crimes like money laundering and terrorist financing.
Full Form of KYC
KYC, full form “Know Your Customer, is used to identify and verify the identity of customers before opening a bank account. It also helps assess the risk potential of an individual when it comes to financial fraud. The KYC process involves collecting and verifying certain personal information. These include your name, address, and identification documents, such as your Aadhar and PAN cards. The report later to verify your identity. It is further to ensure that you are not involved in any illegal activities. If you refuse to provide KYC documents, the bank may not be able to open an account for you.
Even e-wallets like Paytm require KYC now. If you have opened an account with a KYC-compliant bank, you do not need to submit your documents again when opening another bank account in the same bank. You will also need KYC to use credit or debit cards. All customers who do not have bank accounts must produce proof of identity and address while purchasing third-party products from banks if the transaction is for Rs.50,000 and above. KYC exercise may be optional for the bank’s customers when purchasing third-party products. However, in some instances, this may only be applicable sometimes. These cases include instructions to make payments by debit to customers’ accounts.
Another instance is making payments against cheques for the remittance of funds. It also applies to the issue of travelers’ cheques and the sale of gold/silver/platinum. There is also the requirement of quoting your PAN number for transactions of Rs.50,000 and above, whether you are a regular customer or a walk-in-one.
What do Banks Need to do?
The Reserve Bank of India, also known as the RBI, has issued guidelines for implementing KYC norms for financial institutions. These guidelines require banks to collect and verify certain information about their customers, which we have mentioned above. Banks must also maintain records of all customer transactions and periodically update them. This way, banks can detect suspicious transactions.
Do I need KYC for my Business?
Financial institutions, such as banks, typically carry out the KYC process. However, it is also essential for other businesses and individuals to be aware of the process, as they may also be subject to KYC requirements. Companies engaged in financial transactions, such as money transfer services and money changers, must also comply with KYC requirements. In addition, individuals involved in financial transactions, such as buying or selling property or investing in securities, must also comply with KYC requirements.
Final Thoughts
KYC is a process that happens online or offline. It is to identify and verify the identity of customers before opening an account, providing a loan, or engaging in any other financial transaction. There is Aadhar-based KYC and in-person KYC. Several documents are required to verify the identity and address of a person. The process is to combat financial fraud, terrorism funding, and money laundering. It is to comply with various laws and regulations. It is essential for businesses and individuals to be aware of the process, as it may apply to them and because it is critical for the financial system’s stability.
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