KYC compliance: Time consuming, repetitive but critical for your safety

Update your documents regularly so that you are able to fulfil KYC demands seamlessly

The Reserve Bank of India’s (RBI’s) recent clampdown on Paytm Payments Bank has put KYC (Know Your Customer) procedures in the spotlight. If you find these procedures time-consuming and repetitive, and are irritated by demands from various financial institutions to complete these procedures repeatedly, this explainer will help you realise why it is better to fulfil these compliance requirements on time.

   
 

Why are multiple KYCs needed?
 

The biggest pain point of customers vis-a-vis KYC is the non-fungibility of KYC data within and across sectors, necessitating repeated KYCs at various financial institutions.
 

KYC procedures operate more seamlessly in the capital markets. “Once KYC is completed with one KRA (KYC Registration Agency), it is accessible and valid across the securities market, be it a broker, depository participant, investment advisor, or any other entity under the Securities and Exchange Board of India’s (Sebi) jurisdiction,” says Harsh Roongta, head of Fee-Only Investment Advisors, a Sebi-Registered Investment Advisor (RIA). He adds that besides collecting data, KRAs verify it, ensuring its reliability.
 

However, separate KYC procedures are still needed for each organisation in sectors like banking, insurance, and others.
 

A key reason is that CKYC (centralised KYC), handled by the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), is still a work in progress. The quality of CKYC data is a concern. “Concerns regarding the quality of data and other issues compelled the RBI to treat customers onboarded through CKYC as high-risk until the identity of the customer is verified face-to-face,” says Tannya Baranwal, associate partner, IndiaLaw.  
 

In some sectors, regulations prevent one institution from relying on the KYC documents submitted to another.
 

KYC requirements also vary across sectors. “Organisations have different compliance requirements and risk assessments, which can make a one-size-fits-all approach challenging,” says  Vaibhav Kaushik, research analyst at GCL Broking. A centralised KYC repository also poses heightened data privacy concerns.  

 

Why ask for repeated KYCs?  
 

Undergoing KYC at regular intervals is a regulatory requirement. “It is designed to combat financial fraud, money laundering, and terrorism financing,” says Suman Banerjee, chief investment officer, Hedonova, a hedge fund focused on alternative assets.
 

Periodic KYCs serve as a safeguard against identity theft (unauthorised individuals taking over your account). Regular KYC updates, according to Banerjee, help in identifying unusual or suspicious transactions that deviate from a customer's usual pattern of behaviour. Moreover, as regulatory frameworks become more stringent, periodic reviews become crucial.
 

Customers’ circumstances change periodically, requiring KYC details to be updated. “These changes can include alterations in address, marital status, shifting from resident to non-resident status, and so on,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.   
 

The frequency of KYC varies based on a customer’s risk level. Intermediaries assign a risk factor to each client. “Clients deemed higher-risk are required to update their KYC more frequently,” says Roongta.

 

Go for mini or full KYC?
 

Mini KYC, often used for low-risk accounts or wallets with limited functionality, requires minimal identification details from the customer and is typically verified through less stringent methods. “This allows for quick onboarding, making it suitable for those engaging in transactions that fall below a certain monetary threshold,” says Banerjee. However, mini KYC accounts face restrictions such as lower transaction limits and access to a limited range of services. Full KYC involves a comprehensive verification process, including the submission of government-issued ID proofs and possibly in-person verification. But it ensures access to the full range of services. “While full KYC ensures higher security and complies with regulatory standards for financial transactions, it requires more effort from the customer,” says Banerjee.

 

Stay compliant
 

Customers sometimes struggle to fulfil KYC obligations due to document mismatches (differences in names and other details across documents). “These discrepancies can arise from changes in marital status or other reasons,” says Dhawan. Keep the details in your key documents updated. And comply for your KYC norms for your own safety.

 

KYC’s role in fighting crime

 KYC is crucial for fighting crime, including terrorism and human trafficking, by tracking financial transactions
 

 To combat crime, following the money trail is important; KYC enables financial institutions to know their customers, and identify suspicious transactions and flows
 

 In the vast financial system, legitimate customers act as the ‘forest’; criminals are ‘trees’ that attempt to blend in unnoticed; KYC helps identify them
 

 KYC is also mandated by an international convention to which India is a signatory; to meet these international obligations, the country has enacted the Prevention of Money Laundering Act (PMLA); KYC is critical for enforcing PMLA regulations