Recent Amendments in RBI KYC Master Directions, 2016

Introduction

The Reserve Bank of India (RBI), on 17th October 2023 amended the Master Directions on Know your Customer (KYC), 2016. The amendments have tightened the norms of customer due diligence by ensuring a risk based approach for periodic update in the KYC information of the customers by the Banks and Regulated Entities (RE). The amendments are made in line of the recent amendments to the Prevention of Money Laundering (PML) Rules, Unlawful Activities (Prevention) Act (UAPA), 1967, and Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. The FATF Recommendations are also considered by RBI for the amendments. The amendments have been made effective immediately by the RBI. ?

Major Amendments

The following major changes have been made by the RBI through the amendment:

1.???? Section 3: The definition of Customer Due diligence under Section 3(v) (b) of the MD have been amended by appending the words “using reliable and independent sources of identification” in order to ensure reliability in identification. Further an explanation has also been added to the sub-section to ensure reliable sources of identification of customer, taking reasonable steps to understand the nature of business of the customers and identifying the beneficial owner.

Among other changes in section 3, change has been made to bring Asset Reconstruction Companies along with every Regulated Entity (RE) under the application of the MD.

2.???? Section 4: Clause b of the section has been amended in lines with the PMLA Rules where the groups are required to implement policies for discharging the obligations of the group under chapter IV of the PMLA Act. Therefore, every RE shall implement group-wide policies to facilitate sharing of information necessary for client due diligence, PMLA requirements and terror risk management. It is also relevant to safeguard the confidentiality of any such information exchanged for these purposes.

3.???? Section 5A: Clause (b) of Section 5A is amended to provide option to REs that the periodicity of the ML/TF risk assessment exercise may be determined by, either the ‘Board of the RE’ or ‘a Committee of the Board’ to which the power is delegated.

4.???? Section 5B: The RBI has replaced clause (d) of section 5A with Section 5B to introduce a Risk Based Approach (RBA) to be followed by the REs to implement a CDD program which shall take into regard the ML/TF risks identified and the size of business, for mitigation and management of the identified risk and should have Board approved policies, controls and procedures in this regard.

1.???? Section 10: The RBI under clause (b) has added a provision for the REs to file a Suspicious Transaction Report (STR), if required in case of inability to comply with CDD requirements from the customer.

2.???? Section 24: the RBI has introduced monitoring of accounts through addition of clause (h) to the section and has directed to identify customers as per section 16 or 18 in case of suspicion of ML/TF activities.

3.???? Section 38: the RBI has amended the section to direct REs to adopt a risk-based approach for periodic updation of KYC which shall ensure that the information collected under CDD is updated and relevant specifically in case of high-risks.

4.???? Section 41: The RBI has laid guidelines for REs for the CDD of Politically Exposed Persons (PEPs) by amending section 41 to determine the status of beneficial owners, their source of wealth and other such requirements from senior management. Further, the instructions laid under the section shall also apply to the family members or close associates of PEPs.

5.???? Section 54: The RBI has amended section 54 in line with the FATF recommendations and the section now requires REs to apply enhanced due diligence which is proportionate and effective to the risks, to business relations and transactions involving natural and legal persons from jurisdictions for which such risks are called for by the FATF.

6.???? Section 59: The RBI has amended section 59 to mandate the Banks to use diligence procedures and careful observation to spot accounts used as money mule accounts. Once they have identified such accounts, they must take the necessary steps, which may include reporting suspicious activities to FIU-IND.

?Possible implications and the way forward

The welcome addition of amendments such as ensuring effective and reliable system customer identification and due diligence, mandating REs to adopt a risk-based approach for periodic updation of KYC and compliance with various laws to curb money laundering by the RBI will surely pave the way for a robust mechanism to remove corruption from the KYC process and strengthen the existing Master Directions. The addition of a risk-based approach in the amendment shall ensure that the data collected under CDD is up-to-date and relevant in mitigating high risk. One of the major implications of this amendment can be a reduction in acts of money mules due to the monitoring of transactions and minimization of operations by the banks which may lead to fraud.?

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While the amendment does bring hope for an effective and transparent system for the KYC requirements, it is also essential for the REs to take the following actions in order to comply with the sanctions requirements, continuous due diligence, and monitoring:

(i)????????????? Develop cutting-edge technical procedures. These revisions give the industry much-needed clarity on several crucial elements connected to KYC and CDD compliance.

(ii)??????????? Make sure that personnel handling KYC matters must pass rigorous tests to determine their level of ethics and integrity, as well as their knowledge of applicable rules and KYC criteria. They should also be required to have effective communication skills and the flexibility to adapt to changing regulatory needs.

(iii)????????? Ensure that the sources and tools used to conduct KYC are independent sources with a verified history of reliability.

(iv)?????????? Curate and implement organization-wide due diligence policies that are in compliance with the updated Master Directions.