The Reserve Bank of India (RBI), through its a circular dated: October 17, 2023, amended the Master Direction on Know Your Customer (KYC) (“Master Directions”) to impose stricter Customer Due Diligence (“CDD”) guidelines, instructing regulated entities (which, inter alia, includes NBFCs, scheduled commercial banks, payment system providers, prepaid payment instruments etc.) (“RE”) to adopt a risk-based approach for regularly updating KYC information. Following are, inter alia, some key changes brought about by RBI:
- To establish beneficial ownership of an individual, in case of customer which is a partnership firm, the previous threshold of having a 15% ownership or entitlement to a share of profit or capital has been lowered to a threshold of 10%. Consequently, REs are now required to perform KYC procedures for individuals who hold at least 10% ownership or are entitled to 10% of the profit share of the partnership firm, or exert control over management or policy decisions.
- The CDD definition has been amended in line with the Financial Action Task Force guidance. REs will now be obligated to identify transactions exceeding INR 50,000/- (Indian Rupees Fifty Thousand) and, as a part of CDD, verify customer’s identity. CDD shall now include-
- A. Identification of the customer, verification of their identity using reliable and independent sources of identification, obtaining information on the purpose and intended nature of the business relationship, where applicable;
- B. Taking reasonable steps to understand the nature of the customer’s business, and its ownership and control;
- C. Determining whether a customer is acting on behalf of a beneficial owner, and identifying the beneficial owner and taking all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.
- In addition to the above, with respect to the opening of account of Politically Exposed Persons (“PEPs”)- REs would be required to undertake enhanced CDD process and employ suitable risk management systems to verify if the beneficial owner is a PEP. Additionally, such accounts will only be opened with approval from the senior management and will undergo continuous monitoring to check for suspicious activity. PEPs have been defined under the Master Directions as individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of States/Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.
In conclusion, the recent amendment to KYC norms has brought significant changes affecting REs. These changes encompass a wide range of areas, from the criteria for identifying beneficial owners within partnership firms to the periodicity of money laundering or terrorism financing risk assessments and enhanced CDD threshold for PEPs.
