The Reserve Bank of India (RBI) has issued new guidelines for customer due diligence (CDD) by banks and regulated entities (REs) on Tuesday. The central bank has asked them to adopt a risk-based approach for periodic updating of Know Your Customer (KYC) information. The amendments to the Master Direction on KYC follow the latest government instructions related to money laundering, unlawful activities, and weapons of mass destruction. The RBI has also updated some instructions in line with the recommendations from the Financial Action Task Force (FATF). The new provisions will come into effect immediately.
Risk-based Approach for KYC Updation
According to the amended Master Direction, REs have to ensure that the information or data collected under CDD is kept up-to-date and relevant, particularly where there is high-risk. REs have to undertake CDD as per the process for their customers. The risk-based approach for periodic updation of KYC has been revised to include the following factors:
- The nature and level of risk associated with the customer, product, service, or transaction
- The type and amount of information or data available on the customer
- The frequency and nature of customer transactions or interactions
- The changes in customer behaviour, profile, or circumstances
- The availability and reliability of independent or third-party sources of information or data
REs have to apply enhanced due diligence measures for customers who pose higher risks, such as politically exposed persons, non-resident customers, non-face-to-face customers, and customers from high-risk jurisdictions. REs have to also apply simplified due diligence measures for customers who pose lower risks, such as salaried employees, pensioners, and government entities.
Prevention of Money Mules and Money Laundering
The RBI has also instructed REs to strictly adhere to the guidelines on opening accounts and monitoring transactions, in order to minimise the operations of “Money Mules”, which are used to launder the proceeds of fraud schemes (like phishing and identity theft) by criminals, who gain illegal access to deposit accounts. “Banks shall undertake diligence measures and meticulous monitoring to identify accounts, which are operated as Money Mules and take appropriate action, including reporting of suspicious transactions to FIU-IND,” the RBI said.
The RBI has also aligned its instructions with the latest government notifications related to the Prevention of Money-Laundering Rules, the Unlawful Activities (Prevention) Act (UAPA), and the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act. These notifications require REs to verify the identity of customers, maintain records of transactions, and report certain information to the authorities. The RBI has also updated some instructions in accordance with the FATF recommendations, which are aimed at combating money laundering, terrorist financing, and proliferation financing.
Implications and Challenges for REs
The new KYC norms are expected to improve the quality and reliability of customer information and data, and help REs to comply with the regulatory and legal requirements. The risk-based approach will also enable REs to allocate their resources more efficiently and effectively, and focus on the customers who pose higher risks. The new norms will also enhance the security and integrity of the financial system, and prevent the misuse of funds for unlawful activities.
However, the new KYC norms also pose some challenges and costs for REs, such as:
- The need to update their policies, procedures, systems, and controls to implement the risk-based approach
- The need to train their staff and educate their customers on the new KYC requirements
- The need to obtain and verify additional information or data from customers, especially those who pose higher risks
- The need to monitor and report any changes or anomalies in customer transactions or behaviour
- The need to coordinate and cooperate with other REs and authorities for sharing and accessing customer information or data
The RBI has advised REs to take necessary steps to ensure compliance with the new KYC norms, and to report any difficulties or issues to the central bank.
