Know Your Customer (KYC)

 Know Your Customer (KYC) is a process used by financial institutions, banks, and other regulated entities to verify the identity, address, and other relevant details of their clients. The purpose of KYC is to prevent fraud, money laundering, and financing of illegal activities by ensuring that institutions know who they are dealing with.

Key Features:

Identity Verification: Collection of official documents to confirm the client’s identity. Common documents include PAN card, Aadhaar card, passport, voter ID, or driver’s license.

Address Verification: Proof of residence is required, such as utility bills, rental agreements, or bank statements.

Financial Background Checks: Assessing the source of funds, occupation, and financial status to ensure transactions are legitimate.

Mandatory Compliance: KYC is legally required for opening bank accounts, investing in mutual funds, purchasing insurance policies, or trading in securities in India. Non-compliance may lead to account freezing, restrictions, or rejection of services.

Periodic Updates: Customers are required to update KYC records periodically, typically every 2–3 years, to maintain compliance.

Purpose of KYC: Prevent Money Laundering (AML): Ensures that funds are not used for illegal purposes.

Combat Fraud: Reduces risks of identity theft, financial scams, and fraudulent transactions.

Regulatory Compliance: Financial institutions adhere to rules laid down by RBI, SEBI, and other regulatory authorities.

Enhanced Customer Due Diligence: Helps institutions understand the risk profile of their clients.

Example: Mr. Sharma wants to open a bank account. The bank requests his PAN card, Aadhaar, and address proof. Once verified and approved, the account is activated for transactions and investments. Periodically, the bank may ask Mr. Sharma to update his KYC to maintain compliance