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Saturday, February 23, 2013

Understanding KYC, eKYC and CKYC

[Last Update : 12-Nov-2017]
As the financial industry in India evolves, it is easy to get lost in the complexity of  this evolution. Know Your Customer (KYC) has many facets today - KYC, eKYC, CKYC, KIN being some of them. A simple and clear explanation will help you set things in perspective...Read on..

Background of KYC
The main purpose of KYC norms was to restrict money laundering and terrorist financing when it was introduced in late the 1990s in the United States. The US government turned very strict after 9/11 and all regulations were finalized before 2002 for KYC.Taking a leaf out of the US book, the Reserve Bank of India (RBI) too directed all banks to implement KYC guidelines for all new accounts in the 2nd half of 2002.

What is KYC?
In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.
This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof.

Mandatory details required under KYC norms are proof of identity and proof of address. Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof of residence can be a ration card, an electricity or telephone bill or a letter from the employer or any recognized public authority certifying the address.
Some banks may even ask for verification by an existing account holder. Though the standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted, which differ from bank to bank.

Other aspects of KYC
To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBI has given various directives to banks:
(1) Strengthening the banks' 'Internal Control System' by allocating duties and responsibilities clearly, and periodically monitoring them.
(2) Before giving any finance at branch level, making sure that the person has no links with notified terrorist entities and reporting any such 'suspect's' accounts to the government.
(3) Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC guidelines are being properly adhered to or not by banks.
(4) Most important, banks must keep an eye out for all banking transactions and identify suspicious ones. Such transactions will be immediately reported to the bank's head office and authorities and norms shall also be laid down for freezing of such accounts.
(5) KYC is not centralized across all agencies e.g. it is a separate for SEBI, Banks, Gas agencies etc..e.g. Applicants must be KYC compliant while investing with any SEBI registered funds, applying for gas connections or opening a new bank account
(6) KYC does not get expired. Once the KYC Acknowledgement is obtained and informed to a Mutual Fund, it will be registered against the folio and quoted in all future account statements. The same will exist in perpetuity, unless cancelled by CVL.
(7) KYC is done free of cost.

How to obtain KYC
Different agencies have established different mechanism to obtain KYC. e.g. to obtain KYC with SEBI (e.g. for buying mutual funds or opening a new mutual fund account), The Association of Mutual Funds of India (AMFI) has facilitated a centralized platform through CDSL Ventures Limited ("CDSL"), a wholly owned subsidiary of Central Depository Services (India) Limited, to carry out the KYC procedure on behalf of all Mutual Funds. CVL through its Points of Service (PoS) will accept KYC Application Forms, verify documents and provide the KYC Acknowledgement (across the counter on a best effort basis). The list of PoS will be displayed on the websites of Mutual Funds, CDSL and AMFI. Once the KYC is duly completed in all regards, the investor needs to produce a copy of the acknowledgement when investing for the first time with a Mutual Fund. There is no need to repeat the KYC process individually for each mutual fund.

What is eKYC
We already understood KYC. It is the known and regular process in the Mutual Fund industry whereby the identity of an investor is verified based on written details submitted by him / her on a form, supplemented by an In Person Verification (IPV) process. Once the verification is done successfully, the relevant investor data is entered into the KRA Registration Agency (KRA) system and subsequently uploaded to their database. 
On the other hand, eKYC is the KYC done with the help of a investor’s Aadhaar number.  While completing the eKYC process, the authentication of the investor’s identity can be done: 
(a) Via One Time Password (Limits investments to Rs 50,000 per year per mutual funds and mandates investments via the online electronic mode) 
(b) Via Biometrics (No limits on the investment amount here unless those specifically imposed by the scheme / Fund House) 
This data is uploaded into the records of the KRA. 

So, eKYC is essentially the same as KYC - done electronically using Adhaar Number.

What is CKYC or Central KYC?
CKYC refers to Central KYC (Know Your Customer) puts a structure in place which allows investors to complete their KYC only once before interacting with various entities across the financial sector. CKYC is managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR). 
The objective of CKYC is to reduce the burden of producing KYC documents and getting those verified every time when the investor deals with a financial entity for the first time. Thus, CKYCR will act as centralized repository of KYC records of investors in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector. 
In the old format of KYC, PAN was the sole identifier for an investor. However, in new Central KYC Registry system, the list goes beyond Aadhaar and PAN. It removes the submission of KYC at different level or to different financial institutions of your financial transactions.

CKYC Form on RBI Website
There is a single CKYC Form that you need to fill up for all your KYC requirements in the financial sector. Different websites and financial companies and institutions hold this form on their respective websites. Best is to get the latest form from the RBI website by clicking here

Account Types for CKYC
Three types of accounts are specified. 
1) Small Account Type
If your aggregate of all credits in a financial year does not exceed rupees one lakh, the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand or the balance at any point of time does not exceed rupees fifty thousand, then you will be considered as SMALL account type of investor.
2) Simplified Account Type
The simplified or low-risk customers means customers who are not able to submit anyone among 6 documents listed. They are Passport, driving license, PAN card, Voter ID, job card issued by MNREGA or Aadhaar Card.
3) Normal Account Type
If you do not fall in small or simplified(Low-Risk Customers) category, then you are a normal customer. You can use any of six officially valid documents (PAN, AADHAAR, Voter ID, Passport, Driving license, MNREGA Job Card) can be submitted for the ID of the customer. 

While filling up the CKYC form, you have to select which account type is applicable to you.

What about FACTA declaration?
This CKYC or Central KYC also includes the FATCA declaration. Hence, it avoids you declare the same at the different level of your investments.

Check your KYC/CKYC Status online
Visit the Karvy website link to check CKYC or Central KYC status online. You just need to enter your PAN Number to check the status of your KYC / CKYC. 


What is ‘KYC Identification Number’?
KYC Identification Number (KIN) is a 14 digit number allotted by CERSAI to an investor who has completed his / her CKYC formalities. This number should be mentioned each time the CKYC details are required to be accessed by any intermediary. 
When you search for your KYC details online (as mentioned above), you will also get to see your CKYC ID, which is an important quote for future references like modifying or updating your KYC data. Do note that if your KYC was registered in the old system of KYC, then the status will not reflect your CKYC ID, instead, it will show the old KYC data.


Is CKYC applicable for you?
CKYC compliance is applicable for investments received from February 1, 2017 on wards. Note that: 
a) New investors (investors for whom no record exists in any of the KRAs) 
These investors will have to mandatorily submit the CKYC form along with the investment application. If the investor has filled the KRA application form in lieu of CKYC form, he will have to additionally submit the Supplementary CKYC form along with the KRA application form. 
b) Existing investors (investors for whom a record exists in any of the KRAs, regardless of the KYC status) 
These investors can continue making investments without any additional requirements. In case any modification is required to be done in the KYC status, then only KRA forms are to be used. 

Is CKYC compliance mandatory for all categories of investors?
Currently, CKYC is applicable only to Individuals (both Resident Individuals and Non-Resident Individuals (NRIs)). 

Getting your KYC is a mandatory step in getting prepared to get into the equity market. The earlier you do it, the better for you.

Revision History
23-Feb-2013 : Original Article with only KYC Details
12-Nov-2017 : Included eKYC, CKYC and KIN

Cheers

Manoj Arora
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