Master Direction

The Master Direction – Know Your Customer (KYC) Direction, 2016 was issued by the Reserve Bank of India (RBI) to establish robust guidelines for customer identification and due diligence processes. These guidelines are crucial for preventing money laundering, terrorist financing, and other financial crimes, ensuring the integrity and stability of the financial system.

Before the issuance of the Master Direction – Know Your Customer (KYC) by the Reserve Bank of India (RBI) in 2016, the Prevention of Money-Laundering Act (PMLA), 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 were the primary regulations governing KYC and Anti-Money Laundering (AML) practices in India. In terms of the provisions of the PML Act, 2002 and the PML Rules, 2005, as amended from time to time by the Government of India, Regulated Entities (REs) are required to follow certain customer identification procedures while undertaking a transaction either by establishing an account-based relationship or otherwise and monitor their transactions.

Therefore, these guidelines shall be applicable to the following:

1. Banks:
   • All Scheduled Commercial Banks (SCBs)
   • Regional Rural Banks (RRBs)
   • Local Area Banks (LABs)
   • Primary (Urban) Co-operative Banks (UCBs)
   • State and Central Co-operative Banks (StCBs / CCBs)
   • Any other entity licensed under Section 22 of the Banking Regulation Act, 1949
2. All India Financial Institutions (AIFIs)
3. Non-Banking Financial Companies (NBFCs), Miscellaneous Non-Banking Companies (MNBCs), and Residuary Non-Banking Companies (RNBCs)
4. Asset Reconstruction Companies (ARCs)
5. Payment System Providers (PSPs), System Participants (SPs), and Prepaid Payment Instrument Issuers (PPI Issuers)
6. Authorised Persons (APs), including agents of the Money Transfer Service Scheme (MTSS)

Key Components of the Master Direction:

1. Customer Acceptance Policy (CAP): Financial institutions must define criteria for accepting customers, including guidelines for high-risk customers. The policy should ensure that no account is opened in a fictitious or anonymous name.
2. Customer Identification Procedures (CIP): Verification of customer identity using reliable and independent documents such as passports, driving licenses, Aadhaar cards, and PAN cards. Institutions must verify the identity of the customer before establishing a relationship or conducting transactions.
3. Customer Due Diligence (CDD): Assessing the risk level of customers and conducting appropriate due diligence based on the risk. For high-risk customers, enhanced due diligence (EDD) may be required.
4. Ongoing Due Diligence: Continuous monitoring of customer transactions to identify unusual or suspicious activities. Updating customer profiles periodically to ensure that the information remains current and accurate.
5. Record Management: Maintaining records of customer identification and transactions for a specified period, typically five (5) years. Records must be easily retrievable for audits and inspections.
6. Reporting Requirements: Reporting suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
7. Compliance with International Standards: Adhering to international standards and obligations, such as those set by the Financial Action Task Force (FATF).

Practical Aspects of KYC Guidelines:

The practical implementation of the KYC guidelines involves several steps and procedures to ensure compliance and effectiveness. Here’s how these guidelines are applied in practice:

1. Customer Onboarding: Collecting and verifying identity documents from new customers during the account opening process. Using electronic verification systems to cross-check the authenticity of the documents.
2. Risk Assessment: Conducting risk assessments for new and existing customers based on factors such as the type of account, transaction patterns, and customer background. Assigning risk ratings to customers and applying appropriate due diligence measures based on the risk level.
3. Transaction Monitoring: Using advanced software and algorithms to monitor customer transactions in real-time. Flagging unusual or suspicious transactions for further investigation.
4. Periodic KYC Updates: Regularly updating customer KYC information to ensure that it remains current and accurate. Re-verifying documents and updating records as needed.
5. Reporting Suspicious Activities: Reporting any suspicious transactions to the FIU-IND promptly. Keeping records of the reported transactions for regulatory audits.
6. Compliance and Training: Appointing compliance officers responsible for ensuring adherence to KYC and AML regulations. Conducting regular training programs for employees to educate them on KYC procedures, AML laws, and how to identify and report suspicious activities.
7. Central KYC Records Registry (CKYCR): Uploading and updating KYC data on the CKYCR for better record management. Facilitating seamless sharing of KYC information among financial institutions.

RBI Imposes Penalty on Manappuram Finance Limited for KYC Non-Compliance

The Reserve Bank of India (RBI) imposed a fine of Rs 17 lakh on Manappuram Finance Limited, a non-banking finance company, for violating KYC (Know Your Customer) rules and prepaid payment instrument norms. This penalty was levied under Section 30 of the Payment and Settlement Systems Act, 2007, as detailed in an RBI press release dated April 18, 2022.

According to the press release, the penalty was based on deficiencies in regulatory compliance and did not reflect on the validity of any transactions or agreements the company had with its customers. The company was found to have breached RBI instructions regarding KYC and minor prepaid payment instrument standards.

As a result, Manappuram Finance Limited was issued a notice to show cause as to why a penalty should not be imposed for failing to adhere to the regulations. After reviewing the company’s response and conducting a personal hearing, the RBI concluded that the non-compliance charges were substantiated. This led to the imposition of a monetary penalty on the company.

Conclusion:

The Master Direction – Know Your Customer (KYC) Direction, 2016, plays a vital role in maintaining the integrity of the financial system by preventing money laundering and terrorist financing. The practical implementation of these guidelines ensures that financial institutions can effectively identify and verify customers, monitor transactions, and report suspicious activities. By adhering to these guidelines, financial institutions contribute to a safer and more transparent financial environment.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.