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Customer Identification Procedure - CIP - in a Bank

The policy approved by the board of banks must clearly spell out the Customer Identification Procedure to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity / veracity or the adequacy of the previously obtained customer identification data. Customer identification means identifying the customer and verifying his/ her individuality by using reliable, independent source documents, data or information. Banks need to obtain adequate information necessary to establish, to their satisfaction, the identity of each new customer, whether regular or irregular, and the purpose of the intended nature of banking relationship. Being satisfied means that the bank should be able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance with the extant guidelines in place. Such risk-based approach is considered necessary to avoid inconsistent cost to banks and a burdensome regime for the customers. In addition to risk perception, the nature of information / documents necessary would also depend on the type of customer (individual, corporate etc.) For customers that are natural persons, the banks must obtain sufficient identification data to verify the identity of the customer, his address / location, and also his recent photograph. For customers that are legal persons or entities, the bank should :

  • Verify the legal status of the legal person or entity through proper and significant documents
  • Verify that any person declaring to act on behalf of the legal person / entity is so authorized and identify and verify the identity of that person
  • To understand the ownership and control structure of the customer and find out who are the natural persons who ultimately control the legal person.

Banks may formulate their own internal guidelines based on their experience of dealing with such persons/entities, normal bankers’ caution and the legal requirements as per established practices. It should be noted that wherever banks wish to collect any information about the customer for a purpose other than KYC requirements, it must not form part of the account opening form. Such information may be collected independently, purely on a voluntary basis, after explaining the objectives to the customer and taking his express approval for the specific uses to which such information could be put. There should be Know Your Customer procedures for existing customers. Banks are expected to have adopted due diligence and suitable KYC norms at the time of opening of accounts in respect of existing customers. However, in case of any omission, the requisite KYC procedures for customer identification must be completed at the earliest. Additionally, banks must, on the basis of materiality, apply the KYC guidelines to all existing accounts. Transactions in existing accounts must be continuously monitored and any unusual pattern in the operation of the account should trigger a review of the customer confidential documentation measures. Banks might apply monetary limits to such accounts based on the nature and type of the account. It may however be make sure that all existing accounts of companies, firms, trusts, charities, religious organizations and other institutions are subjected to minimum KYC standards which would establish the identity of the natural/ legal person and those of the “beneficial owners.” Banks must also ensure that term/ recurring deposit accounts or accounts of similar nature are treated as new accounts at the time of renewal and subjected to revised KYC procedures.

Where the bank is unable to apply suitable KYC measures due to non-furnishing of information and or/ non-cooperation by the customer, the bank must close the account or terminate the relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level.

To make sure that existing small account holders are not inconvenienced and the KYC procedure is completed in time, banks might limit the application of KYC procedures to existing accounts. KYC procedures should applied to all existing accounts of trusts, companies/firms, religious/charitable organizations and other institutions or where the accounts are opened through a mandate or power of attorney.

Deposits and Bank Accounts
Fixed deposits