The Reserve Bank of India (“RBI”) vide notification no. RBI/2023-24/24 dated April 28, 2023, has brought amendment to the Master Direction on Know Your Customer dated February 25, 2016 (“Master Directions”). These Master Directions are applicable to all the regulated entities including but not limited to the scheduled commercial banks, non-banking financial companies, all India financial institutions, payment system providers, prepaid payment instrument issuers (“Regulated Entities”) to undertake customer due diligence for their customers.
According to the RBI, these changes have been brought about with a view to (i) align the instructions with the recent amendments carried out under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”); (ii) incorporate instructions in terms of the Government Order dated January 30, 2023, titled “Procedure for Implementation of Section 12A of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (“WMD Act”)”; (iii) update instructions in accordance with the Financial Action Task Force (“FATF”) recommendations; and (iv) refine certain extant instructions post review.
The following are some of the key amendments being introduced by the RBI under the Master Directions:
- Identification of Beneficial Owner
In order to determine the beneficial owner for both companies and trusts, the controlling ownership interest has been reduced to 10% (ten percent) of the shares or capital or profits of the company from the earlier threshold of 25% (twenty-five percent) in case of a company and 15% (fifteen percent) in case of a trust, respectively.
Under the Master Directions, for opening an account of a legal person who is not a natural person, the beneficial owners shall be identified. However, post amendment, an exemption from identification of a beneficial owner has been carved out in line with the PML Rules wherein, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such an entity who is (i) listed on a stock exchange in India, or (ii) is an entity resident in jurisdictions notified by the Central Government and listed on stock exchanges in such jurisdictions, or (iii) is a subsidiary of such listed entities.
- Customer Due Diligence (“CDD”)
The CDD measures i.e., identifying and verifying the customer and the beneficial owner has been amended to include certain additional details or documentation required for the following categories of non-individual customers such as companies, partnership firms, and trusts. For opening an account of a company, partnership firm, and a trust, the certified copies of each of the following documents or the equivalent e-documents shall be obtained:
- the names of the relevant persons holding senior management position; and
- the registered office and the principal place of its business, if it is different.
- Partnership firms:
- the names of all the partners; and
- address of the registered office, and the principal place of its business, if it is different.
- the names of the beneficiaries, trustees, settlor, and authors of the trust
- the address of the registered office of the trust; and
- list of trustees and documents for those discharging role as trustee and authorized to transact on behalf of the trust.
- Updation/Periodic Updation of KYC
Under the Master Directions, the RBI has introduced another method for periodic updation of KYC i.e., Aadhaar OTP based e-KYC in non-face to face mode. Furthermore, as per the amendment, declaration of current address shall not require positive confirmation if the current address of the customer is different from the address in Aadhaar. Moreover, in line with the amendment, to prevent any fraud, the Regulated Entities shall ensure that the mobile number for Aadhaar authentication matches with the customer’s profile.
Moving forward in order to comply with the PML Rules, customers must submit updated copies of the documents to the Regulated Entities in case any updation is required in the documents which the customers initially submitted at the time of the establishment of their business relationship or account-based relationship. For the purpose of updating the records at Regulated Entities end, the documents shall be submitted within 30 (thirty) days of the update to the documents.
- Enhanced Due Diligence
Enhanced due diligence measures have been introduced under the Master Directions including but not limited to the following: (i) verification of the current address of the customers by the Regulated Entities before allowing operations in the account; (ii) the Regulated Entities shall obtain the Permanent Account Number (“PAN”) from the customers and verify the same from the verification facility of the issuing authority; (iii) accounts opened in non-face to face mode shall be subject to enhanced monitoring using digital mode such as Central KYC Records Registry (“CKYCR”), Digi Locker and non-digital mode such as copies of the passport, driving license, etc.
The steps undertaken by the RBI by way of amendment under the Master Directions aims at promoting effective implementation of legal, regulatory, and operational measures for combating money laundering and terrorist financing. It is interesting to note that apart from the aforesaid provisions, the central bank has also introduced certain new definitions including but not limited to the terms ‘shell bank’, ‘politically exposed persons’, ‘correspondent banking’, etc. video-based customer identification process, etc. for allowing the Regulated Entities to effectively undertake customer due diligence for their customers in line with the framework established under the Master Directions.