Operational Aspects of KYC
Principles & Practices of Banking | Unit 1 Chapter Notes
Customer Acceptance Policy, six CIP trigger events, OVDs (PAN is NOT one!), beneficial owner thresholds, Aadhaar OTP account limits, V-CIP, Digital KYC, CKYCR/CERSAI, wire transfer rules, and periodic updation (2-8-10 years) — everything examiners love to test from this chapter.
📌 Why This Chapter Matters in JAIIB
Chapter 3 is where the Chapter 2 theory becomes operational practice. Expect 5–8 questions every attempt — from OVD identification (PAN is the classic wrong answer), the 6 CIP trigger events, beneficial owner thresholds (25% for companies, 15% for others), Aadhaar OTP account limits, V-CIP / Digital KYC rules, CKYCR upload timelines, wire transfer thresholds, and the 2-8-10 periodic updation schedule. Every number in this chapter has appeared in past papers.
Customer Acceptance Policy (CAP)
The Customer Acceptance Policy (CAP)of a bank lays down the criteria for accepting a customer from the perspective of ML/TF risks. It is one of the four mandatory elements of a bank’s KYC Policy (see Chapter 2). RBI’s KYC Directions 2016 prescribe the following norms that every bank’s CAP must include:
No anonymous or benami accounts
No account to be opened in a fictitious, anonymous, or benami name under any circumstances.
No account if CDD cannot be done
Account not to be opened if CDD procedure cannot be completed due to customer non-cooperation or unreliable documents.
No transaction without CDD
No transaction or account-based relationship to be initiated without completing the CDD procedure.
Acting on behalf clearly defined
Circumstances in which a customer may act on behalf of another person or entity must be clearly spelt out in the policy.
Sanction list check
Identity of prospective customer must be checked against sanction lists circulated by RBI — no account for sanctioned persons.
PAN verification
Permanent Account Number (PAN) to be obtained and verified through the facility of the issuing authority.
Digital signature verification
Digital signature of any e-document submitted by the customer must be verified.
Consent for optional information
Mandatory KYC info is specified in the Policy. Optional/additional information to be obtained only with prior consent, and only after account is opened.
Joint accounts: CDD for all
In joint accounts, CDD procedure must be carried out for every joint account holder — no exceptions.
⚠️ Exam Trap — CAP Cannot Deny Basic Banking
The Customer Acceptance Policy must NOT result in denial of banking or financial services to members of the general public, especially those who are financially or socially disadvantaged. If an existing customer fails to comply with KYC guidelines, the bank may close the account only after giving due notice.
Customer Identification Procedures (CIP) — When & How
Customer identification means identifying and verifying identity using reliable, independent source documents, data, or information. CIP is not just for account opening — there are six distinct triggers where identification is mandatory.
🧠 6 Trigger Events for CIP — Must Memorise All Six
Opening an account or establishing any account-based relationship
Threshold: Always required — no threshold
Doubt about authenticity, adequacy, or correctness of existing customer's information
Threshold: Whenever doubt arises
International wire transfer for a non-account holder
Threshold: ANY value — no threshold at all
Selling any product (including third-party) or loading/reloading prepaid/travel cards
Threshold: Value exceeding ₹50,000
Transaction or series of connected transactions for a walk-in customer
Threshold: Value exceeding ₹50,000
Doubt that customer is intentionally structuring transactions to stay below threshold
Threshold: Below ₹50,000 but structuring suspected
⚠️ Classic Exam Trap — International Transfer Threshold
For international transfers of a non-account holder, CIP is required for ANY value— there is no minimum threshold of ₹50,000. Options “₹50,000 and above” or “over ₹50,000” are wrong. The correct answer is “any value”. This has appeared in nearly every JAIIB attempt.
Officially Valid Documents (OVDs) — Only Six
The following documents have been notified as OVDs under KYC Directions. PAN Card is not in this list — a source of the most common mistakes in JAIIB.
| # | OVD | Note |
|---|---|---|
| 1 | Passport | Also valid for NRIs — certified copy accepted |
| 2 | Driving Licence | State-issued; contains address and photo |
| 3 | Proof of possession of Aadhaar number | Not the card itself — the Aadhaar number proof |
| 4 | Voter's Identity Card (ECI) | Issued by Election Commission of India |
| 5 | Job Card issued by NREGA | Duly signed by an officer of the State Government |
| 6 | Letter issued by National Population Register (NPR) | Containing name and address details |
🚨 PAN Card is NOT an OVD
PAN Card does NOT appear in the list of Officially Valid Documents. PAN or Form 60 is a separate mandatory requirement for KYC — but it is not an OVD. When a question asks to identify which is NOT an OVD, PAN Card is always the answer. Proof of possession of Aadhaar number, NREGA Job Card, and NPR Letter ARE OVDs.
Address-Only Proof Documents (Limited Purpose)
If an OVD does not have an updated address, the following can be used for address only. An OVD with current address must be submitted within 3 months:
⚠️ 3-Month Rule
When an address-only document is accepted, the customer must submit an OVD with their current address within 3 months. For foreign nationals whose OVD has no address — a Government-issued document from the foreign jurisdiction + letter from the Foreign Embassy or Mission in India is accepted.
Customer Due Diligence (CDD) — Individuals, Entities & Beneficial Owners
Customer Due Diligence (CDD) goes beyond mere identification. It includes building a complete profile: location, activity, purpose of banking, nature of business, mode of payments, volume of turnover, social and financial status. The depth of CDD varies by customer type.
A. CDD for Individuals
The following four categories of individuals must be subject to CDD:
Documents required:
Aadhaar OTP-Based e-KYC — Account Restrictions
Non-face-to-face accounts opened using OTP-based Aadhaar verification carry strict limits:
| Restriction | Limit / Rule |
|---|---|
| Aggregate balance — all deposit accounts | Cannot exceed ₹1 lakh (account made non-operational if exceeded until OVD submitted) |
| Credit accounts (credit limit) | Cannot exceed ₹2 lakh |
| Borrowal accounts | Only term loans; aggregate not to exceed ₹60,000 in a year |
| Maximum validity of OTP-based account | 1 year — normal CDD must be completed within 1 year |
| If OVD not submitted within 1 year | Deposit account closed; no disbursals on borrowal account |
| Declaration required | Customer must declare no other such account has been opened nor will be at any other FI/bank |
B. CDD for Sole Proprietorship Firms
CDD of the individual proprietor must be done plus any two documents from the following list (if two cannot be furnished, one may be accepted with field verification):
C. CDD for Other Legal Entities
| Entity Type | Key Documents Required |
|---|---|
| Companies | Certificate of Incorporation + Memorandum & Articles of Association + PAN + Board Resolution + POA granted to managers/employees + KYC of authorised signatories, BOs, POA holders + details of Beneficial Owners |
| Partnership Firms (Registered) | Registration Certificate + Partnership Deed + PAN + KYC of partners, BOs, POA holders |
| Trusts (Registered) | Certificate of Registration + Trust Deed + PAN or Form 60 + KYC of BOs and POA holders |
| Unincorporated Associations / Body of Individuals (incl. unregistered partnerships, societies) | Resolution of managing body + PAN or Form 60 + POA for transactions + KYC of members of managing body, BOs, POA holders |
| Other Juridical Persons (Universities, Village Panchayats, etc.) | Document showing person authorised to act + KYC of BOs and POA holders + document establishing legal existence of entity |
D. Identification of Beneficial Owners (BO)
A Beneficial Owner (BO) is a natural person who ultimately owns or controls a legal entity, or on whose behalf a transaction is being conducted. The threshold for determining BO varies by entity type.
| Entity Type | BO Threshold |
|---|---|
| Company (unlisted) | Beneficial Owner = any person holding MORE THAN 25% share in capital or profits OR who exercises control: appoints majority directors / controls management or policy decisions |
| Partnership Firm (Registered) | MORE THAN 15% share in capital or profits Each qualifying partner is a Beneficial Owner |
| Body of Individuals / Association of Persons (incl. unregistered partnership, societies) | MORE THAN 15% share in capital, profits, or property Also covers any person who exercises effective control |
| Trust (Registered) | Author + Trustees + Beneficiaries with 15% or more interest AND any other person exercising effective control over the trust |
⚠️ Exam Trap — 25% vs 15%
Company → 25% threshold for beneficial ownership. All others (partnerships, body of individuals, trusts) → 15%. Questions often mix these. If a company is listed on a stock exchange or is a subsidiary of a listed company, identification of beneficial owners is NOT required.
E. Enhanced Due Diligence (EDD)
Non-Face-to-Face Customers (other than Aadhaar OTP)
First payment must be effected through the customer's KYC-complied account with another Reporting Entity — to ensure the account holder is genuine.
Politically Exposed Persons (PEPs) in a Foreign Country
Senior politicians, Heads of State, judicial/military officers, state-owned corporation executives. Decision to open account: senior management level. Additional steps: check public domain information, examine sources of funds, seek information about BOs who are PEPs. Family members and close associates are treated similarly.
Client Accounts by Professional Intermediaries
If account for single client — identify the client. Pooled accounts for regulated intermediaries (mutual funds, pension funds) — normal course. Accounts of intermediaries bound by confidentiality prohibiting disclosure — do NOT open. If bank relies on intermediary's CDD — ultimate responsibility remains with the bank.
F. Simplified Due Diligence (SDD)
| Category | Simplified Procedure |
|---|---|
| Self-Help Groups (SHGs) — Savings Bank a/c | CDD of office bearers only; NOT required for all members |
| Self-Help Groups (SHGs) — Credit Linking | CDD of ALL members required |
| Foreign Students | NRO account on Passport + visa + admission letter from Indian institution. Local address declaration within 30 days. Foreign remittances up to USD 1,000 or ₹50,000 during first 30 days. Pakistani nationals: prior RBI approval required. |
| Foreign Portfolio Investors (FPI) | Based on specified documents per SEBI category. Several documents exempted. FATCA/CRS rules apply. Undertaking from FPI or Global Custodian to submit exempted docs on demand. |
Small Accounts — For Those Without OVDs
For financial inclusion, a savings account can be opened for persons who possess no OVD. These are called Small Accounts and carry strict restrictions:
| Restriction | Limit |
|---|---|
| Annual credits | Not to exceed ₹1 lakh |
| Monthly withdrawals & transfers | Not to exceed ₹10,000 |
| Balance at any point | Not to exceed ₹50,000 |
| Foreign remittance | NOT allowed |
| OVD submission deadline | Within 12 months (extendable by another 12 if applied) |
Account opened on customer’s self-declaration (self-attested photo + address), signed in presence of a designated bank official. If ML/FT suspicion arises at any time, full CDD must be completed.
Unique Customer Identification Code (UCIC)
Every bank must assign a UCIC to each customer — a unique code to track all facilities, monitor transactions holistically, and build a consolidated risk profile. Key rules:
Periodic KYC Updation — The 2-8-10 Rule
Customer profiles change over time — occupation, address, financial status. Banks must periodically refresh KYC data. The frequency depends on the customer’s risk category.
🧠 Mnemonic — Periodic Updation: 2-8-10
“High risk needs frequent check-ins — every 2. Medium waits 8. Low relaxes to 10.”
Procedure for Periodic Updation
| Scenario | Procedure |
|---|---|
| No change in KYC info (Individual) | Self-declaration from the customer via email/mobile/ATM/net banking/letter — no documents needed |
| Change of address only (Individual) | Self-declaration of new address via email/mobile/ATM/net banking — then positive address confirmation within 2 months |
| Minor turns major | Fresh photographs mandatory; verify existing docs against current CDD standards; fresh KYC if required |
| No change in KYC info (Legal Entity) | Self-declaration + letter from authorised official + Board resolution via email/mobile/ATM — plus verify beneficial ownership is up-to-date |
| Change in KYC info (Legal Entity) | Full KYC process same as for onboarding a new customer |
| Existing customers without PAN/Form 60 | Obtain PAN/Form 60 by notified date; if customer fails, operations may be temporarily ceased after reasonable notice |
⚠️ Exam Points on Periodic Updation
Alternate CDD Modes — V-CIP, Digital KYC & CKYCR
Three alternate modes have been permitted to facilitate CDD for large numbers of customers or those in distant locations: (1) CDD by Third Party, (2) Video-based Customer Identification Process (V-CIP), and (3) Digital KYC.
A. CDD by Third Party
B. Video-Based Customer Identification Process (V-CIP)
V-CIP is a digital channel for customer onboarding — treated on par with face-to-face CIP when done per prescribed standards. Key operational points:
| Aspect | Requirement |
|---|---|
| Who can use V-CIP? | New individual customers; proprietor (proprietorship); authorised signatories & BOs for legal entities; conversion of OTP Aadhaar a/cs; periodic KYC updation |
| Infrastructure | Must be housed in own bank premises; own secured network domain; end-to-end encrypted |
| Geo-tagging | Video recordings must contain GPS coordinates and date-time stamp |
| Customer consent | Recorded in an auditable, alteration-proof manner |
| IP restriction | Application must block connections from IP addresses outside India or spoofed IPs |
| Process conducted by | Only by officials of the Reporting Entity (RE); Banking Correspondents can facilitate at customer end |
| Questions variation | Sequence and type of questions must be varied — to prevent coaching |
| Prompting | If any prompting is observed at customer end, the process must be rejected |
| Account activation | Account made operational only AFTER subject to concurrent audit |
| Data storage | Entire data and video recording stored in India only |
C. Digital KYC
Digital KYC requires the bank official to meet the customer in person (unlike V-CIP, which is video-based). Business Correspondents can be used. Key requirements:
Pre-Requisites
Photograph Requirements
Post-Capture Verification
D. Central KYC Records Registry (CKYCR)
What is CKYCR?
CKYCR receives, stores, and safeguards KYC records in digital form. Government of India has authorised CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) to act as the CKYCR. Each customer gets a KYC Identifier — a unique number that allows any Reporting Entity to retrieve their KYC data without asking for fresh documents.
| Rule | Details |
|---|---|
| Upload deadline | Within 10 days of commencement of account-based relationship |
| Individuals — accounts from | January 1, 2017 onwards (upload to CKYCR required) |
| Legal Entities — accounts from | April 1, 2021 onwards (upload to CKYCR required) |
| Older accounts | Uploaded to CKYCR during periodic updation |
| KYC Identifier communicated to | Customer — by the bank that uploaded the records |
| If customer submits KYC Identifier | Bank shall retrieve records online — no fresh documents needed UNLESS: information changed / address needs verification / EDD required |
⚠️ Exam Trap — CERSAI = CKYCR
Questions often ask “which entity has been designated as CKYCR?” The answer is CERSAI — not UIDAI, not RBI, not FIU-Ind. Upload within 10 days of starting the account-based relationship. Individuals from Jan 2017; Legal Entities from April 2021.
Wire Transfers, Demand Drafts & Other Operational Rules
A. Wire Transfer Rules
| Type | Threshold | Information Required |
|---|---|---|
| Cross-border wire transfer | ALL transfers — no minimum (incl. credit/debit card transactions) | Name, address, and account number (or unique reference number if no a/c) of originator. Exception: both remitter AND beneficiary are banks/FIs. |
| Domestic wire transfer | ₹50,000 and above | Name, address, and account number of originator |
| Structuring (domestic) | Below ₹50,000 but structuring suspected | Identify customer; if non-cooperative, establish identity + file STR to FIU-Ind |
Roles in a Wire Transfer Chain
B. Other Operational Rules
Demand Drafts / Remittances ≥ ₹50,000
Domestic remittances by DD, MT/TT/NEFT/IMPS, or travellers cheques of ₹50,000 and above must be effected by debit to account or against cheque — NOT against cash. Purchaser's name must be printed on the face of the instrument.
Validity of Payment Instruments
Cheques, drafts, pay orders, banker's cheques: must NOT be paid if presented more than 3 months after date of the instrument.
Account Payee Cheques
Account payee cheques must be collected only for the payee constituent. Exception: banks may collect account payee cheques up to ₹50,000 for co-operative credit societies (for their own constituents).
PAN / Form 60 (Income Tax Rule 114B)
PAN or equivalent e-document must be obtained and verified for specified banking transactions above prescribed limits. If customer has no PAN, Form 60 must be obtained.
Third-Party Product Sales
Walk-in customers: identify for transactions of ₹50,000 and above. PAN mandatory for ₹50,000+ transactions. Transactions must be by debit to account or against cheques (no cash). AML software must generate alerts for CTR/STR for such transactions.
Money Mules
Criminals recruit account holders ('money mules') to receive and transfer proceeds of fraud. RBI: if an account is found to be used as a Money Mule account, it is deemed that the bank has not complied with KYC Directions. Strict adherence to account opening and transaction monitoring guidelines is the mitigation.
At-Par Cheque Facility to Co-operative Banks
Commercial banks must monitor at-par cheque facility offered to co-operative banks. Right to verify co-operative bank's KYC/AML compliance records. Co-operative bank must cross 'account payee' on all at-par cheques irrespective of amount.
Transaction Monitoring & Record Management
Transaction Monitoring
The objective is to fulfil obligations for furnishing prescribed information to FIU-Ind. Monitoring considers the customer’s risk profile; special attention is paid to:
Definition of “Transaction” under PMLA
“Transaction means a purchase, sale, loan, pledge, gift, transfer, delivery or arrangement thereof and includes: opening of an account; deposit, withdrawal, exchange or transfer of funds; use of a safety deposit box; entering into any fiduciary relationship; any payment for contractual or legal obligation; or establishing a legal person or legal arrangement.”
What Makes a Transaction “Suspicious”?
To a person acting in good faith, the transaction (including an attempted transaction):
Record Management Requirements
| Record Type | Retention Period |
|---|---|
| All transaction records (domestic and international) | At least 5 years from the date of the transaction |
| Customer identification records and address obtained during account opening and business relationship | At least 5 years after the business relationship is ended |
| Transaction data (nature, amount, currency, date, parties) | 5 years — must allow reconstruction of individual transactions |
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