RBI amends KYC Master Directions

The RBI has, on this Tuesday, notified a few new amendments to RBI KYC Master Directions (RBI KYC MD). The amendments come into effect right away. While the RBI KYC MD has been amended several times, the RBI has introduced these amendments with a very specific objective – improving India’s prospects in the upcoming Financial Action Task Force (FATF) review.

The FATF is the global money laundering and terrorist financing (ML/TF) watchdog. With about 39 countries as its members, the FATF is quite powerful. It conducts regular reviews to assess how a member country’s anti-money laundering (AML) regulations (and other measures) fare when compared to the FATF’s benchmark. The Government and regulators are keen to ensure that India’s FATF reviews go well. Because the findings in the review will reflect if India’s AML measures are robust enough to abate ML/TF risks. KYC is one of the most important measures to prevent ML/TF risks. Therefore, the robustness of KYC measures will also determine India’s chances of securing a favorable FATF review. The latest amendments to RBI KYC MD are notified with this objective in mind. Most of the amendments make RE’s KYC obligations more specific and/or align them with FATF’s recommendations. Some key amendments are captured below:

(a) The amendments clarify that the principal officer of an RBI Regulated Entity (RE) must be a part of the RE’s management.

?(b)?The definition of ‘Customer Due Diligence (CDD)’ is amended to align it with the CDD’s description under the FATF guidance .

?(c) Under the RBI KYC MD, REs must ensure that accounts are opened only once the CDD is complete. The amendments state that if an RE is not able to complete CDD, because of non-cooperation of customers or non-reliability of documents, the RE may consider filing a suspicious transaction report (STR) with the Financial Intelligence Unit – India.

?(d) The RBI KYC MD allows REs to rely on KYC conducted by a third party provided the REs comply with certain conditions. One such condition is that REs must obtain KYC documents from the third party. The amendment requires REs to obtain the document immediately. This is aligned with the FATF’s recommendations on this issue. Before the amendments, REs had 2 days (from when they decide to rely on the third-party KYC) to obtain the documents.

(e) The amendments require REs to implement specific due-diligence measures to identify money mule accounts. To recap, earlier this year, the Standing Committee on Finance’s Report on ‘Cybersecurity and Rising Incidence of Cyber/White Collar Crimes’ acknowledged that miscreants have opened money mule accounts after misusing loopholes in video KYC processes. These accounts were used to receive proceeds of cyber fraud. The RBI must have imposed this additional obligation on REs to keep similar threats at bay.

(f) The RBI KYC MD prescribes a simplified KYC process for low-value NBFC accounts. The amendments specify if there is a suspicion that money laundering/terrorism financing (ML/TF) activities may be conducted through these accounts, REs must follow the full-fledged KYC process for these accounts too.

?(g)?The REs must, as per the RBI KYC MD, implement some enhanced due-diligence measures before they open accounts of politically exposed persons (PEPs). These measures include enhanced monitoring on an ongoing basis and approval from senior management to open the account. The amendments clarify that REs must determine (at the account opening stage and on an ongoing basis) if the customer is a PEP. REs must also take reasonable measures to determine a PEP’s source of wealth.

?(h)?The amendments specify that REs must implement such AML measures as international or intergovernmental organizations prescribe if (i) India is a member of these organizations, and (ii) the Indian Government has agreed to implement the measures.

-??Astha Srivastava

Principal Associate

Ikigai Law

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(DM at [email protected] if you’d like to discuss)