The objective of KNOW YOUR CUSTOMER (KYC) guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better, which in turn help them, manage their risks prudently.
The Basel committee has highlighted the need for financial institutions to implement effective ‘Know-your-customer’ (KYC) standards as an essential part of risk management practices.
The Basel committee also stated that a key challenge in implementing sound KYC policies and procedures in how to put in place an effective approach. The legal and reputation risks are global in nature and as such, it is essential that each financial institution develop a global risk management programme supported by policies that incorporate KYC standards.
It is important that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of services to general public, especially to those, who are financially or socially disadvantaged.
The term ‘money laundering activities’ cover not only the criminals who try to launder their ill-gotten gains, but also the bank/financial institutions and their employees who participate in their transactions and have knowledge that the property is criminally derived. “Knowledge” includes the concept of conscious avoidance of knowledge. Thus, employees of branches whose suspicions are aroused, but who then deliberately fail to make further inquiries/report to higher authorities, wishing to remain ignorant, should be considered to have the requisite “knowledge” of criminal activities/transactions.