Bank KYC: Why it is so important?

This October, a team of cyber security researchers detected a critical security issue in the KYC registration of India’s Central Depository Services Limited (CDSL). CDSL is India’s largest securities trading depository, and holds KYC data of over 4 crore investors. The security breach was rectified within a week of detection. We hear news like this often. And we are required to fill up KYC forms while opening a bank account. Let’s see what makes KYC so important.  

What is KYC? 
KYC is the means of identifying and verifying the identity of the customer through verified and reliable sources, such as government approved documents, previous financial data or identification information. Banks obtain photo-included identification documents, address, email ID, phone number and recent photograph of individual customers while opening an account. Similar information is also required for joint holders and mandate holders. In case of group accounts, such as company or society accounts, banks obtain identification data verifying the legal status of the entity, operating address, identity of authorized signatories and of beneficial owners. As a customer of the bank, we coordinate about our KYC with the Relationship Manager or the bank staff who initiate the account opening. 

Why is KYC important?  
Know Your Customer is the process of verifying the actual, legal identity of a customer. The objective of KYC is to prevent banks from being misused by criminals for money laundering activities. It also enables banks to understand its customers and their financial requirements better and manage its risks prudently, for example, they need KYC to grant loans. KYC guidelines have been created by the Reserve Bank of India, with recommendations from the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). India’s Prevention of Money Laundering Act requires banks, financial institutions and intermediaries to follow KYC and AML guidelines.  

Why KYC needs to be updated? 
Refreshing KYC is very important to keep our accounts safe. Banks follow a mandated periodic refresh cycle for KYC documents to ensure all the details are updated. But if we change address or obtain a new document (such as getting the PAN card on turning 18), we need to inform the bank and update these details.