TERM PAPER

OF
BANKING AND
INSURANCE

SUBMITTED TO:
M/S MAHESH CHANDRA
JOSHI

SUBMITTED BY:
FARIHA KHANAM
R1813B33
BBA-MBA
REG.NO.10805127
SECTION: R1813B33

Introduction To KYC norms

Know your customer (kyc) guidelines are 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. Banks should frame their kyc policies
incorporating the following four key elements:

i. Customer acceptance policy;

ii. Customer identification procedures;
iii. Monitoring of transactions; and
iv. Risk management.

For the purpose of kyc policy, a ‘customer’ may be defined as:

• A person or entity that maintains an account and/or has a business relationship with
the bank;
• One on whose behalf the account is maintained (i.e. The beneficial owner);
• Beneficiaries of transactions conducted by professional intermediaries, such as stock
brokers, chartered accountants, solicitors etc. As permitted under the law, and
• Any person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank, say, a wire transfer or issue of a high value
demand draft as a single transaction.

Banks are supposed to follow KYC norms to monitor transactions of a suspicious nature and
to prevent money laundering. Therefore, the banks ask customers for documents relating to
residence or identity proofs such as a driving licence, or a permanent account number
(PAN).But it has been noticed that if customers, who have new joint accounts, move the
account from one branch to another, or request a bank statement to be sent at a new address,
they have a hard time with compliance. Banks have been strict and have asked for proof of
residence in each instance. But it’s not practically feasible for everyone to provide proof of
residence. A couple may live in the same house as their parents, brothers or sisters. If the
rental agreement or the home ownership is in the name of one person only, it becomes very
difficult for any other family member to provide address proof. In addition, the utility bills,
such as telephone or electricity bills, which are acceptable as proof, are in the name of one
person and useless for any other family member. As a result, many customers haven’t been
able to avail of banking services and have faced difficulties in getting account statements,
money transfers and other services. According to RBI directive the identity documents, banks
can now ask for a utility bill, which could be in the name of the husband or father.

In addition, a declaration has to be given by the father or husband that the relative, who wants
to open an account, lives in the same house. RBI has also ruled that for supplementary
evidence, a letter received through mail can also be used for verification.

DATA COLLECTION

About Money Laundering

Money laundering has become a pertinent problem worldwide threatening the stability of
various regions by actively supporting and strengthening terrorist networks and criminal
organizations. The links between money laundering, organized crime, drug trafficking and
terrorism pose a risk to financial institutions globally.

What is Money Laundering and Financial Terrorism?

Money laundering refers to conversion of money illegally obtained to make it appear as if it

originated from a legitimate source. Money laundering is being employed by launderers
worldwide to conceal criminal activity associated with it such as drugs /arms trafficking,
terrorism and extortion. Financial Terrorism means financial support to, in any form of
terrorism or to those who encourage, plan or engage in terrorism. Money launderers send
illicit funds through legal channels in order to conceal their criminal origin while those who
finance terrorism transfer funds that may be legal or illicit in original in such a way as to
conceal their source and ultimate use, which is to support Financial Terrorism.

Features to be verified and documents that may be obtained from customers

Features
Accounts of individuals
• Legal name and any other names
used
• Correct permanent address
Documents
(i) Passport (ii) PAN card (iii) Voter’s
Identity Card (iv) Driving licence
(v) Identity card (subject to the bank’s
satisfaction) (vi) Letter from a recognized
public authority or public servant verifying
the identity and residence of the customer to
the satisfaction of bank
 (i) Telephone bill (ii) Bank account
statement (iii) Letter from any recognized
public authority

(iv) Electricity bill (v) Ration card

(vi) Letter from employer (subject to

satisfaction of the bank)

( any one document which provides

customer information to the satisfaction of
the bank will suffice )
Accounts of companies (i) Certificate of incorporation and
Memorandum & Articles of Association (ii)
• Name of the company Resolution of the Board of Directors to open
• Principal place of business an account and identification of those who
• Mailing address of the company have authority to operate the account (iii)
Power of Attorney granted to its managers,
• Telephone/Fax Number officers or employees to transact business on
its behalf (iv) Copy of PAN allotment letter
(v) Copy of the telephone bill
Accounts of partnership firms (i) Registration certificate, if registered (ii)
Partnership deed (iii) Power of Attorney
• Legal name granted to a partner or an employee of the
• Address firm to transact business on its behalf (iv)
• Names of all partners and their Any officially valid document identifying the
addresses partners and the persons holding the Power
of Attorney and their addresses (v)
• Telephone numbers of the firm and Telephone bill in the name of firm/partners
partners
Accounts of trusts & foundations (i) Certificate of registration, if registered (ii)
Power of Attorney granted to transact
• Names of trustees, settlers, business on its behalf (iii) Any officially
beneficiaries and signatories valid document to identify the trustees,
• Names and addresses of the founder, settlors, beneficiaries and those holding
the managers/directors and the Power of Attorney, founders/managers/
beneficiaries directors and their addresses (iv) Resolution
of the managing body of the
• Telephone/fax numbers foundation/association (v) Telephone bill
Customer Acceptance
Before commencing a business relationship with a prospective customer, the Bank has to
ensure that such a relationship does not, in any way, go against its Customer Acceptance
principles:

I) No account is opened in anonymous or fictitious/ benami name(s) and

II) Customers are categorised based on risk perceptions in terms of the nature of business
activity, location of customer and his clients, mode of payments, volume of turnover, social
and financial status, etc.

A Customer Profile (in the prescribed format) containing information relating to the
customer's social/ financial status, nature of business activity, information about his clients'
business and their location, Sources of funds, Annual Income, etc. shall be obtained
from/prepared for all the applicants for opening SB/CA/ Term deposits accounts. The
customer profile shall be updated, on a periodical basis, as under:

For low risk customers ------------------------once in 3 years

For medium risk customers----------------------------every year

For high risk customers----------------------------every year

However, these periodicities are only indicative and wherever warranted, the updating
exercise may be done even at lesser frequencies taking into account the activities, conduct of
operations, etc.

Customer identification
Customer identification means identifying the customer and verifying his/her/its identity by
using reliable, independent source documents, data or information. Customer Identification is
carried out at different stages i.e., while establishing a banking relationship, carrying out a
financial transaction or when the branch has a doubt about the authenticity/veracity or the
adequacy of the previously obtained customer identification data. For opening an account,
normally, the customer should come to the Bank in person. An account shall not, normally, be
opened without a meeting between the bank official and the customer. Branches need to
obtain sufficient information to their satisfaction, to establish the identity of each new
customer, whether regular or occasional and the purpose of the intended nature of banking
relationship. The process of enquiry/verification of the documents shall be a thorough one by
having a dialogue with the prospective depositor, introducer, borrower and guarantor and
confirmation through other channels, if necessary. Wherever it is necessary, a discreet
verification shall also be made about the credentials of the parties, their business potential etc.
The process of verifying a customer's identity and his/her credentials is not a faultfinding
exercise but to create a better customer relationship that may safeguard the mutual interests of
the Bank as well as the customer.

When does KYC apply?

KYC will be carried out for the following but is not limited to:

• Opening a new account.(deposit/ borrowal )

• Opening a subsequent account where documents as per current KYC standards not
submitted while opening the initial account.

• Opening a locker facility where these documents are not available with the bank for
all locker facility holders.

• When the bank feels it is necessary to obtain additional information from existing
customers based on the conduct of the account.

• After periodic intervals based on instructions received from RBI.

• When there are changes to signatories, mandate holders, beneficial owners, etc.

Confusion regarding KYC norms for mutual funds, for example –

• You, as investors, are getting scared on repeatedly receiving emails informing you to
complete your KYC norm for mutual funds
• KYC norm for mutual fund is difficult and time consuming
• KYC is needed for all the mutual fund transactions, like redemption, bank account
change, etc
• Not compiling with KYC could be illegal and punishable with penalty

KYC is not mandatory, but optional, for Mutual Fund

transactions
KYC is required only for the following 2 types of mutual fund transactions –
 1. Single purchase / investment of Rs 50,000 or more – KYC is needed for purchase of
Rs 50,000 or more thru single cheque or purchase of Rs 50,000 or more in single SIP
instalment
2. Single switch of Rs 50,000 or more – KYC is needed for switch of Rs 50,000 or more
thru single switch transaction between funds

KYC is not required for any of the other or the following

mutual fund transactions –
• Withdrawal / redemption any number of times and for any amount, even for amount of
Rs 50,000 or more
• Multiple purchases / investments of less than Rs 50,000. For example KYC is not
needed for multiple investments of Rs 49,000 each
• SIP instalments of less than Rs 50,000. For example KYC is not needed where each
SIP instalment is Rs 49,000
• SIP instalments where cumulative amount of all the SIPs is more than Rs 50,000. For
example KYC is not needed for SIP amount of Rs 5,000 per month for 12 month
period. Even though over the 12 month SIP, Rs 60,000 ( 5,000 X 12 ), more than Rs
50,000, will get invested.

KYC Process for Mutual Funds

To complete your KYC requirement for mutual funds, you need to do the following –

• One time exercise – KYC form submitted to one mutual fund is enough, as the same
KYC submitted to one mutual fund will automatically get reflected across all your
mutual funds
• KYC form – Complete and sign the Individual KYC Form
• Photo – Put your passport size photo on your KYC form and sign across the photo
• PAN card copy – Attach signed copy of your PAN card
• Address proof Copy – Attach signed copy of your address proof document,
for example -
• Passport
• Driving License
• Voter Identity
• Card Ration Card
• Latest Telephone Bill
• Latest Electricity Bill
• Latest Bank Passbook
• Latest Bank Account Statement
• Latest Demat Account statement
• Registered Lease / Sale Agreement of residence
 Proof of Address issued by Bank Managers of Scheduled Commercial Banks /
•
Multinational Foreign Banks / Gazetted Officer/ Notary Public / Elected
Representatives to the Legislative Assembly / Parliament l Document issued by any
Government or Statutory Authority
• These documents should not be more than one months old as on the date of
submission of your KYC form
• Submission – Submit your KYC form and your PAN & Address doc to any mutual
fund company or to your financial advisor. To become the KYC compliant for mutual
funds.

Review of literature:

1. Posted: Fri, Jun 18 2010. 9:57 PM IST

Economy and Politics

IrDA committee recommends tightening KYC norms to

stop mis-selling
In an effort to stop mis-selling of insurance policies, Irda, on Friday issued draft regulations
asking insurers to supervise agents and submit a complete needs analysis report for each
prospective customer

Anirudh Laskar

Mumbai: In an effort to stop mis-selling of insurance policies, the Insurance Regulator and
Development Authority, or IrDA, on Friday issued draft regulations asking insurers to
supervise agents and submit a complete needs analysis report for each prospective customer.
In a first of its kind move, the report has recommended that life insurers compulsorily collect
details of customers’ lifestyle, financial health, future plans, and exact need of insurance and
so on.

“Keeping the vulnerable public protected from unfair practices is of utmost importance.
Unfair practices could arise in a scenario of increasing number of insurers, intermediaries and
insurance products and severe competition for business,” the report said.
In order to assess the exact financial needs of customers, it has been proposed to monitor the
role of the intermediaries by the insurers. IrDA should require insurers to establish a system to
supervise the recommendations made to customers by intermediaries, it said. IrDA has sought
feedback on the proposals by 5 July.

2. MONEY LAUNDERING
ABSTRACT

India’s promising position as a financial centre and its system of informal cross border money
flows makes the country’s susceptibility to money laundering. Some frequent sources of
illegitimate earnings in India are narcotics trafficking, corruption, income tax evasion etc.
Combating money laundering is the most important task for the financial sector. For India, to
diminish informal money transfer channels, it needs to fortify enforcement around the
important areas - responsibility of management in Anti Money Laundering (AML) policies,
scrutinizing of AML systems, adoption of appropriate ‘Know Your Customer’ norms,
transaction monitoring, staff training towards regulation compliance.
• JEL Classification Number: 3
• Author name – Mrs. Medha R Gujarathi
• Affiliation – Phoenix – A&G Capital Pvt Ltd, Mumbai
• Full postal address –
2/ Bachubai, Bldg., First Floor, J. Bhatankar Road, Parel, Mumbai - 12
• Telephone (and/or fax) number – +91 - 9819074020
• Brief biography –
Mrs. Medha Gujarathi is MMS Finance from Mumbai University.
She is an Investment Banker with 3 years of work-experience.
Currently working with Phoenix – A&G Capital Pvt Ltd as a Financial Analyst

3. Are KYC norms crossing the limits?

Business Line
| July 18, 2006 | Copyright

(From Business Line) from BUSINESS LINE, July 18, 2006 Mumbai, July 17 - Too much of
anything is not good, or so the adage goes. This is true in the case of banks enforcing Know
Your Customer (KYC) norms. With the Reserve Bank of India penalising several banks for
violating KYC norms, most banks are now applying them with zeal, even at the cost of losing
customers sometimes. The mandatory details required under KYC norms are proof of
residence such as ration card, letter from employer or the housing society and proof of
identity, which could be any photo identity such as passport, voter ID card, PAN card, and
driving licence. But customers often face banks.
4. RBI slaps Rs 5 lakh fine on Citibank for flouting KYC norms.
Asia Africa Intelligence Wire
| October 08, 2004 | Copyright

(From Business Line)

Mumbai, Oct. 7 - THE Reserve Bank of India has slapped Rs 5 lakh fine on Citigroup's Indian
banking unit, for flouting the central bank's 'Know Your Customer' norms, with regard to not
verifying the background of an account holder.
Reportedly, the account holder in question was Mr Abdul Karim Telgi and his associates, who
were involved in the 'fake stamps scam'. Mr Telgi and his associates had opened accounts and
parked funds with Citibank.
A RBI spokesperson confirmed that Citibank had been fined for not verifying the background
of an account holder and that the violation has attracted a penalty, which could go up to Rs 5.

5. KYC norms: RBI fines IDBI.

Business Line
| August 22, 2006 | Copyright

(From Business Line)

From BUSINESS LINE, August 22, 2006 Mumbai, Aug. 21 - The Reserve Bank of India
today imposed a penalty of Rs 5 lakh on IDBI Ltd for violation of know your customer
(KYC) norms and guidelines relating to IPO financing
This is the second time the bank is being fined for the same violations. The last time the RBI
had fined the bank in February 2006 for Rs 5 lakh for the same

RESEARCH METHODOLOGY:
I am taking secondary data for my research from various sources which were listed in
bibliography.

And i am doing descriptive research. Descriptive research deals with everything that
can be counted and studied. But there are always restrictions to that. Our research must have
an impact to the lives of the people around us. The reader of the research will know what to
do to prevent that disease thus; more people will live a healthy life.

This research is the most commonly used and the basic reason for carrying out descriptive
research is to identify the cause of something that is happening. For instance, this research
could be used in order to find out the cause of this research, how KYC norms are crossing its
limits. However, if the research is to return useful results, whoever is conducting the research
must comply with strict research requirements in order to obtain the most accurate
figures/results possible.
CONCLUSION:
I conclude that in current scenario unfair practices could arise because of increasing number
of insurers, intermediaries and insurance products and severe competition for business. We all
know that excess of everything is bad. People are being frustrated because kyc norms needs
ration card, letter from employer or the housing society and proof of identity, which could be
any photo identity such as passport, voter ID card, PAN card, and driving licence as
mandatory details of customer. Because of this excess requirement the banks are losing
customers sometimes. IDBI bank has been impose fine by RBI for violating KYC norms,
most banks are now applying them with zeal, even at the cost of losing.
E mail about the confirmation of customer account must not be sent again and again. KYC
norms is not mandatory for mutual funds but it is needed for the transaction like redemption
bank account changes etc.

FINDING AND SUGGESTION:

As I conclude that under KYC norms documentation is becoming a work load for customer
and bank too. It is time consuming. For which if a person wants to transfer their account from
one place to another they need to deposit all documents again. And bank takes lots of time in
transferring. My suggestion is to reduce paper work to make it simple and easier to access the
provided services to customer. It should be online and less wok to be done. It is needed for
mutual fund and must not be over loaded to follow. And also its not protect

BIBLIOGRAPHY:
• http://www.accessmylibrary.com/article-1G1-149884623/kyc-norms-rbi-fines.html

• http://www.igidr.ac.in/~money/Gujrathi_Medha.pdf

• http://www.livemint.com/2010/06/18215713/Irda-committee-recommends-tigh.html

• http://docs.google.com/viewer?
a=v&q=cache:pMiTB2pHCjgJ:https://leads.hdfcbank.com/common/pdf/KYC_norms.
pdf+introduction+to+kyc+norms&hl=en&gl=in&pid=bl&srcid=ADGEESi5d7up7wl
GdoZwWdyfeJrIpV_M1dgtqpZYQP3rVgp8pvPDvO3lVa_Xj8P11IFL-
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HIEtbTSjAJy_TIHBWHc857D5Wxk0QjT1A

• http://docs.google.com/viewer?
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kyc+norms+followed+by+banks&hl=en&gl=in&pid=bl&srcid=ADGEEShn
AeWrdcsdk3Q_-
chKteHVMwsA_Ftw0gQZgMLHRUrKYL8OvZsZLkTg_EKO4fjK8WktH4f8-
Wuwjk97lYcEx-
oVlaxcBe15_jHOGGDQW5WanIvSCC8VgNTBFUV0aMhZ_d9ZFm0Y&sig=AHI
EtbR8cRv1TtlgOpMKCPaAKGsr0Ay2zw

• http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2039&Mode=0