Background: Strengthening KYC Compliance
With the aim to simplify the KYC process for financial institutions and enhance the effectiveness of customer identification measures, ensuring compliance with anti-money laundering and counter-terrorism financing regulations, RBI has recently made crucial amendments to its Master Directions -Know Your Customer (KYC) Directions, 2016, (“Amended Directions”) effective November 6, 2024. The updates are part of RBI’s efforts to bring the KYC guidelines in line with recent changes in related legal frameworks, including the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”), and the Unlawful Activities (Prevention) Act, 1967.
Understanding KYC’s Role in Financial Security
Know Your Customer (“KYC”) is a process financial institutions use to verify the identities of their customers. Nowadays, KYC is essential in helping prevent illegal activities, including money laundering and terrorist financing, which pose serious threats to the financial system. By conducting background checks, KYC allows organisations to ensure their customers are not involved in any unlawful activities, protecting both the institution and the client.
Key Highlights of Amended Directions:
1. Unified KYC Process
The Amended Directors have been simplified the KYC process with regard with regard to existing customers. The Amended Directions now provides that the customer due diligence process can be completed at Unique Customer Identification Code level. This means a KYC-compliant customer of a Regulated Entities (“REs”) will no longer need to repeat the process if they open a new account or use a different service within the same institution.
2. Enhanced monitoring for high risk account
The Amended Directions now extends the explanation that “High risk accounts have to be subjected to more intensified monitoring” to both the sub-paragraphs of paragraph 37 of the Amended Directions. This revision ensure enhances monitoring measures for high risk accounts.
3. Step Towards Centralised Digitisation of KYC
Under the amended rules, REs must upload KYC information to the Central KYC Records Registry (“CKYCR”) within 7 (seven) days whenever received from customer or received as per Rule 9(1c) of the PMLA Rules. CKYCR is mandated then to electronically inform all the reporting entities to update the KYC record of the said customer, having dealt with them previously.
In addition to it, when a KYC identifier is available in the CKYCR, REs should use it instead of asking customers to resubmit KYC documents, unless:
- Information is incomplete or outdated.
- Validity of downloaded documents has expired.
- Additional verification or enhanced due diligence is necessary to assess risk.
This move will significantly impact the end customer making the KYC process more streamlined, convenient and customer friendly. The customers will no longer be obligated to resubmit the KYC document every time, unless there is change to the KYC data.
4. Designation Change in Annex II- UAPA Compliance
Further, the designation of the central nodal officer for the Unlawful Activities (Prevention) Act (UAPA), 1967 has been changed from additional secretary to joint secretary by the Government of India.
Conclusion: Advancing Security
The Amended Directions is a welcome step towards simplifying the KYC process and enhancing the effectiveness of customer identification and verification methods especially in the realm of digitization.
The obligation to undertake customer due diligence at UCIC level will reduce redundancy in the operations of the REs, possibly resulting in reduction in operational cost. The Amended Directions ensures that the REs maintain appropriate risk management framework for intensified check on high risk account. The Amended Directions will further bring a real change to the customer experience by removing the repeated process of sharing KYC documents.
The Amended Directions not only underscore India’s alignment with FATF’s global objectives but also enhance the integrity of its financial system against evolving threats. By integrating technological advancements, such as the CKYCR, with a risk-based KYC model, the RBI positions India’s financial sector to better counter financial crime and align with international regulatory standards. These amendments are a step towards improving the resilience and transparency of India’s financial landscape, marking a balanced approach to modernization and regulatory compliance.
