1. What is the revised standard for the Identification of Beneficial Owners under the Master Direction (MD) - KYC?

The definition of a Beneficial Owner (‘BO’) has a new threshold for 'Controlling ownership interest.' Controlling ownership interest has been revised to ownership of/entitlement of more than 10% shares or capital or profits of the customer company or more than 10% interest in the customer trust, as the case may be. Thus, using trust structures shall not prevent the piercing of the veil for determining  BO.

Exemption: Listed entities, their subsidiaries in India, and other jurisdictions notified by the Government of India are exempt from BO verification.

2. What are the latest document-related protocols for conducting Customer Due Diligence (CDD) on non-individual/individual customers falling under specific categories?

For Proprietorships: Udyam Registration Certificate issued by the MSME Ministry is an additional requirement.

For Companies: Names of senior managerial staff, and registered office and principal place of business (if not the same).

For Partnership Firms: Names of all partners, and address of the registered office and principal place of business (if not the same).

For Trusts: Names of beneficiaries, trustees, settlor, and authors, along with registered office address, and required documents of trustees who are discharging the role of trustee and are authorised to transact on behalf of the trust.

For Not for Profit: Registration on the NITI Aayog Darpan portal is now a mandatory requirement.

Moreover, MD - KYC has extended its scope to include other juridical persons  such as societies, universities, village panchayats etc. acting as Customers.

3. What changes have been made to record management requirements?

Regulated Entities shall keep a record of updated customer identification records, account files, business correspondences, and results of any analysis undertaken for swift dispersal to customers.

These records for customers, including Non-profits, shall be kept for five years after termination of the business relationship between RE and the customer.

4. What are changes to the Customer Identification Process?

Video based Customer Identification Process (“V-CIP”) shall now be the first option that REs offer in case of remote onboarding. All customers, including existing customers, shall be mandatorily allotted a Unique Customer Identification Code by REs.

5. What are the new changes to CDD procedure and sharing KYC with information with Central KYC Records Registry (CKYCR)?

REs can obtain KYC identifiers with explicit customer consent to download KYC records from CKYCR for the purpose of CDD.

6. What are the newly introduced Enhanced Due Diligence Measures?

Section 40 of the MD - KYC has introduced new Enhanced Due Diligence (“EDD”) measures for non-face-to-face customer onboarding processes. The EDD measures may employ digital channels like CKYCR, Digi Locker, equivalent e-document, etc., or non-digital modes such as obtaining copy of officially valid documents (“OVD”) certified by additional certifying authorities

Customers shall be categorized as high-risk customers, and accounts opened non-face-to-face shall face enhanced monitoring till the identity of these customers are verified either through a physical manner or V-CIP.

7. What new technologies have been introduced in the KYC process under the amendments?

Use of Artificial Intelligence(AI)/ Machine Learning(ML) by REs to support effective monitoring has been introduced by RBI in the KYC process .

REs have to undertake risk analysis for Money Laundering (‘ML’) / Terror Financing (‘TF’) in relation to the use of new/developing technologies for both new and pre-existing products.

8. How have the amendments been provisioned for the Updation/Periodic Updation of KYC?

Aadhar OTP-based e-KYC has been introduced in case of a non-face-to-face process for periodic updation of KYC information.

In order to comply with Prevention of Money Laundering Rules, if there is any update in the documents submitted by the customer to the RE, the same shall have to be forwarded to the REs within 30 days of the update occuring.

9. What are Correspondent Banking and the changes associated with it in the MD - KYC amendments? 

Correspondent Banking is banking services given by one (‘correspondent bank’) to another (‘respondent bank’). The amendment has aligned the provisions regarding correspondent banking with international standards. In this regard, banks have to get prior approval from senior management for onboarding correspondent banking services. Correspondent banks shall have to initiate due diligence related to reputation, supervision standards in the domestic jurisdiction, and records pertaining to investigations/regulatory actions in ML/TF of the respondent banks.

10. What are the amendments to the definition of Shell Bank under the MD – KYC?

Under the MD – KYC, Shell bank is a bank that has no physical presence in the country in which it is incorporated/licensed and which is unaffiliated with a regulated financial group.  Existence of only local agent or low-level staff in the incorporated/licensed country does not constitute physical presence for the purpose of this definition.

11. What are the newly introduced amendments to the provisions for Risk Categorisation?

RBI has introduced new parameters for Risk Categorisation which includes geographical risk for both customers and transactions, type of products/services offered, delivery channel used, and the type of transaction undertaken. REs have to additionally frame broad principles for risk-categorisation of customers.

Risk categorisation and the specific reasons for such categorisation shall be kept confidential by the RE.

12. What are the obligations of the REs with regard to International Agreements under the MD – KYC?

The MD - KYC has been amended to sync the provisions with the Prevention and Suppression of Terrorism (Implementation of Security Council Resolutions) Order, 2007. REs have to pay due attention to sanctions lists/schedule lists attached to the aforementioned Order for compliance.

The new amendments have further introduced additional compliance with the Procedure for Implementation of Section 12A of the Weapons of Mass Destruction  and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (‘WMD Act’).

REs have to continuously monitor that details of individuals/entities don’t match the details in the sanctioned list and inform the Central Nodal Officer as per Section 12A of the WMD Act.

13. What are the recommendations for the Customer Acceptance Policy of REs?

 Any additional information which is not mentioned in the internal KYC policy of the RE shall be obtained with the explicit consent of the customers. GST numbers shall be verified from the search/verification facility of the issuing authority.

In case REs have a suspicion of ML/TF activities and there is reasonable belief that performing CDD may alarm the customer, the CDD process shall not be pursued in such cases and the RE shall instead file a Suspicious Transaction Report with the FIU-IND.

Authored by-

Anuroop Omkar (Founding Partner)

Lidia K. Kharmih (Associate)

Tarun Rathore (Associate)

AK & Partners