VIOLATION OF KNOW YOUR CUSTOMER NORMS AND ITS IMPACT

Know your Customer (KYC) is a process by which banks get information of customers’ identity. The Reserve Bank of India (RBI) had issued KYC Guidelines in 2002 and since then RBI has become stricter in dealing with violation of KYC norms, due to the increasing incidents of banking frauds in the recent years.

KYC compliances help the banks or financial institutions to identify its customers and to eliminate illicit contribution to criminal activities such as money laundering, terrorist financing aid etc. This process, therefore, on the recommendations of Financial Action Task Force (FATF) on Anti-Money Laundering (AML) and on Combating Financing terrorism (CFT) has been declared mandatory by RBI to prevent misuse of banks and financial provider’s services.

As per the guidelines of RBI, the bank has to frame their know ‘Your Customer’ policies under four heads: (i) Customer Acceptance policy (classifying customers into high, medium and low risk categories), (ii) Customer Identification procedures (Verifying customer’s identity from reliable sources), (iii) Monitoring of transactions (on the basis of class defined in clause (i)), (iv) Risk Management (periodic check on the medium and high risk class of existing customers).

Further, in the event that the customer does not provide his/her KYC documents at the time of periodic updating, banks will give three months’ notice to such customer and after which partial freezing of accounts would be imposed and thereafter, if the customer does not comply within six months of partial freezing, his/her account shall be rendered as inoperative.

For instance, on 30^th January 2020, RBI has imposed a penalty of Rs. 1 Crore on HDFC bank for violating KYC norms in 39 accounts, which were used for bidding in initial public offering (IPO). The transaction from the accounts in question were disproportionate to the declared income of the customers. It was revealed during the scrutiny by RBI that HDFC Bank had failed to exercise the due diligence for those current accounts. Earlier in the year 2019, RBI had imposed a fine of Rs. 11 Crore on seven banks for the non-compliance of six separate adherences norms to be followed while opening and monitoring new accounts and reporting funds on balance sheet.

Thus, as per various experts, KYC is said to be a step towards ease of business for customers as well as banks and financial institutions, the non-compliance which would invite penalties for banks and financing institutions and partial freezing of accounts for customers, rendering such accounts inoperative.

Rishabh Mahipal

Associate

The Indian Lawyer