IBPS Test 18

Know Your Customer norms represent the foundational layer of the anti-money laundering and counter-terrorism financing compliance framework in the Indian banking sector, establishing the standards for customer identification, due diligence, and ongoing monitoring that banks must follow. The Prevention of Money Laundering Act of 2002 and the rules framed thereunder, along with the Reserve Bank of India's Master Direction on Know Your Customer, form the regulatory foundation for KYC compliance in India. The objectives of KYC are to prevent banks from being used, knowingly or unknowingly, as conduits for money laundering, financing of terrorism, or other criminal activities. This requires banks to establish the identity of customers at the time of account opening, understand the nature and purpose of the business relationship, and monitor transactions to detect unusual or suspicious activity. The Aadhaar biometric identification system has transformed KYC processes in India by providing a reliable, verifiable, and portable identity credential that banks can use to authenticate customer identity digitally. eKYC using Aadhaar authentication allows customers to complete account opening without submitting physical documents, significantly reducing the cost and time of onboarding while improving the reliability of identity verification. The regulatory framework for Aadhaar-based eKYC has evolved through successive court judgements and legislative amendments that sought to balance the imperatives of financial inclusion with concerns about privacy and data security. Video-based Customer Identification Process, or V-CIP, was introduced by the Reserve Bank of India to enable banks to conduct the customer due diligence process through a live video interaction with the customer, further reducing the barriers to account opening for customers in remote locations. Customer Risk Categorisation, which classifies customers as low, medium, or high risk based on factors including customer type, profession, transaction patterns, and geographical location, determines the level of due diligence applied. High-risk customers such as politically exposed persons and those in high-cash businesses require enhanced due diligence including more frequent review and senior management approval. The Financial Action Task Force, the global standard-setter for anti-money laundering and counter-terrorism financing, regularly assesses India's AML-CFT framework through mutual evaluations. India's compliance with FATF standards has improved significantly over the years, and the country achieved recognition as a FATF member in 2010. Transaction monitoring systems deployed by banks use rule-based and machine learning algorithms to identify suspicious transaction patterns, and Suspicious Transaction Reports are filed with the Financial Intelligence Unit-India for analysis and dissemination to enforcement agencies. The framework of beneficial ownership disclosure requires companies and trusts maintaining bank accounts to disclose the natural persons who ultimately own or control them, addressing a key vulnerability in the KYC framework where legal entities were used to obscure the true identity of account holders.