RBI Guidance on CDD for Specific Category of Customers

Part VI - Enhanced and Simplified Due Diligence Procedure

RBI Master Circular dated Feb 25, 2016 as updated on Jan 04, 2024 is the base for this post.

A. Enhanced Due Diligence

1. Non-face-to-face customer onboarding

Enhanced Due Diligence (EDD) for non-face-to-face customer onboarding (other than customer onboarding in terms of Section 17):

Nonface-to-face onboarding facilitates the REs to establish relationship with the customer without meeting the customer physically or through V-CIP. Such nonface-to-face modes for the purpose of this Section includes use of digital channels such as CKYCR, DigiLocker, equivalent e-document, etc., and nondigital modes such as obtaining copy of OVD certified by additional certifying authorities as allowed for NRIs and PIOs. Following EDD measures shall be undertaken by REs for non-face-to-face customer onboarding (other than customer onboarding in terms of Section 17):

a) In case RE has introduced the process of V-CIP, the same shall be provided as the first option to the customer for remote onboarding. It is reiterated that processes complying with prescribed standards and procedures for V-CIP shall be treated on par with face-to-face CIP for the purpose of this Master Direction

b) In order to prevent frauds, alternate mobile numbers shall not be linked post CDD with such accounts for transaction OTP, transaction updates, etc. Transactions shall be permitted only from the mobile number used for account opening. RE shall have a Board approved policy delineating a robust process of due diligence for dealing with requests for change of registered mobile number.

c) Apart from obtaining the current address proof, RE shall verify the current address through positive confirmation before allowing operations in the account. Positive confirmation may be carried out by means such as address verification letter, contact point verification, deliverables, etc.

d) RE shall obtain PAN from the customer and the PAN shall be verified from the verification facility of the issuing authority.

e) First transaction in such accounts shall be a credit from existing KYC-complied bank account of the customer.

f) Such customers shall be categorized as high-risk customers and accounts opened in non-face to face mode shall be subjected to enhanced monitoring until the identity of the customer is verified in face-to-face manner or through V-CIP.

Non-Face-to-Face Transactions - examples

Non face to face transactions include but not limited to;

• Business relationships concluded over the Internet or by other means such as through the post;

• Services and transactions over the Internet;

• Use of ATM machines;

• Telephone banking;

• Transmission of instructions or applications via facsimile or similar means; and

• Making payments and receiving cash withdrawals as part of electronic point of sale transaction using prepaid or re-loadable or account-linked value cards.

2. Accounts of Politically Exposed Persons (PEPs)

A. Establishing a relationship with PEPs

REs shall have the option of establishing a relationship with PEPs (whether as customer or beneficial owner) provided that, apart from performing normal customer due diligence:

(a) REs have in place appropriate risk management systems to determine whether the customer or the beneficial owner is a PEP;

(b) Reasonable measures are taken by the REs for establishing the source of funds / wealth;

(d) all such accounts are subjected to enhanced monitoring on an on-going basis;

(e) in the event of an existing customer or the beneficial owner of an existing account subsequently becoming a PEP, senior management’s approval is obtained to continue the business relationship

B. These instructions shall also be applicable to family members or close associates of PEPs.

The term “politically exposed person”, sometimes used interchangeably with “Senior Foreign Political Figure”, emerged in the late 1990s in the wake of the Abacha Affair: a money-laundering scandal in Nigeria which galvanized global efforts to prevent abuse of the financial system by political figures.

A politically exposed person (PEP) is defined by the Financial Action Task Force (FATF) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing (TF). This has been confirmed by analysis and case studies. The potential risks associated with PEPs justify the application of additional anti-money laundering / counter-terrorist financing (AML/CFT) preventive measures with respect to business relationships with PEPs. To address these risks, FATF Recommendations 12 and 22 require countries to ensure that financial institutions and designated non-financial businesses and professions (DNFBPs) implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs.

While it may be useful for financial institutions to build a list of designated PEPs to reference, doing so is often challenging since the criteria that qualify an individual as a PEP are broadly defined and vary from country to country. The FATF also periodically issues new AML/CFT recommendations on PEPs which further complicates the implementation of any ‘definitive’ PEP list.

The Financial Action Task Force (FATF) subsequently codified the term in its AML guidance, setting out the following 3 classifications of PEP:

1. Foreign PEP

Individuals entrusted with prominent public functions by a foreign country. This category of PEP may include: heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials’.

2. Domestic PEP

Individuals entrusted with prominent domestic public functions. This category includes ‘heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials’.

3. International PEP

The FATF sets out a third category of ‘International PEP’ – known as an individual entrusted with a prominent position by an international organization. This category of PEP covers ‘members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions’.

Relatives and Close Associates (RCA) of the individuals outlined above may also be categorized and treated as a politically exposed person. This category refers to immediate family members or close social or professional contacts of a government or political official, or senior executive – meaning spouses, parents, siblings, children, and spouses’ parents and siblings.

The FATF points out that its three classifications of PEP are ‘not intended to cover middle ranking or more junior individuals’.

RBI, India defines “Politically Exposed Persons” (PEPs)" as individuals who are or have been entrusted with prominent public functions by a foreign country, including the Heads of States/Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.

3. Client Accounts opened by Professional Intermediaries

REs shall ensure while opening client accounts through professional intermediaries, that:

(a) Clients shall be identified when client account is opened by a professional intermediary on behalf of a single client.

(b) REs shall have option to hold 'pooled' accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds or other types of funds.

(c) REs shall not open accounts of such professional intermediaries who are bound by any client confidentiality that prohibits disclosure of the client details to the RE.

(d) All the beneficial owners shall be identified where funds held by the intermediaries are not co-mingled at the level of RE, and there are 'subaccounts', each of them attributable to a beneficial owner, or where such funds are co-mingled at the level of RE, the RE shall look for the beneficial owners.

(e) REs shall, at their discretion, rely on the 'customer due diligence' (CDD) done by an intermediary, provided that the intermediary is a regulated and supervised entity and has adequate systems in place to comply with the KYC requirements of the customers.

(f) The ultimate responsibility for knowing the customer lies with the RE.

B. Simplified Due Diligence

Simplified norms for Self Help Groups (SHGs)

(a) CDD of all the members of SHG shall not be required while opening the savings bank account of the SHG.

(b) CDD of all the office bearers shall suffice.

Accounts of Foreign Students

Procedure to be followed by banks while opening accounts of foreign students

a) Banks shall, at their option, open a Non-Resident Ordinary (NRO) bank account of a foreign student on the basis of his/her passport (with visa & immigration endorsement) bearing the proof of identity and address in the home country together with a photograph and a letter offering admission from the educational institution in India.

i. Provided that a declaration about the local address shall be obtained within a period of 30 days of opening the account and the said local address is verified.

ii. Provided further that pending the verification of address, the account shall be operated with a condition of allowing foreign remittances not exceeding USD 1,000 or equivalent into the account and a cap of rupees fifty thousand on aggregate in the same, during the 30-day period.

(b) The account shall be treated as a normal NRO account, and shall be operated in terms of Reserve Bank of India’s instructions on Non-Resident Ordinary Rupee (NRO) Account, and the provisions of FEMA 1999.

Simplified KYC norms for Foreign Portfolio Investors (FPIs)

Accounts of FPIs which are eligible/ registered as per SEBI guidelines, for the purpose of investment under Portfolio Investment Scheme (PIS), shall be opened by accepting KYC documents as detailed in Annex IV, subject to Income Tax (FATCA/CRS) Rules. Provided that banks shall obtain undertaking from FPIs or the Global Custodian acting on behalf of the FPI that as and when required, the exempted documents as detailed in Annex IV will be submitted

CDD of Small Accounts

As per RBI MD 25 Feb 2016 as updated on 04 Jan 2024, the account shall remain operational initially for a period of twelve months which can be extended for a further period of twelve months, provided the account holder applies and furnishes evidence of having applied for any of the OVDs during the first twelve months of the opening of the said account. The entire relaxation provisions shall be reviewed after twenty-four months.

Simplified procedure for opening accounts by Non-Banking Finance Companies (NBFCs):

In case a person who desires to open an account is not able to produce documents, as specified in Section 16, NBFCs may at their discretion open accounts subject to the following conditions:

a. The NBFC shall obtain a self-attested photograph from the customer.

b. The designated officer of the NBFC certifies under his signature that the person opening the account has affixed his signature or thumb impression in his presence.

c. The account shall remain operational initially for a period of twelve months, within which CDD as per Section 16 or Section 18 shall be carried out.

d. Balances in all their accounts taken together shall not exceed rupees fifty thousand at any point of time.

e. The total credit in all the accounts taken together shall not exceed rupees one lakh in a year.

f. The customer shall be made aware that no further transactions will be permitted until the full KYC procedure is completed in case Directions (d) and (e) above are breached by him.

g. The customer shall be notified when the balance reaches rupees forty thousand or the total credit in a year reaches rupees eighty thousand that appropriate documents for conducting the KYC must be submitted otherwise the operations in the account shall be stopped when the total balance in all the accounts taken together exceeds the limits prescribed in direction (d) and (e) above.

h. The account shall be monitored and when there is suspicion of ML/TF activities or other high-risk scenarios, the identity of the customer shall be established as per Section 16 or Section 18.

Happy Reading,

Those who read this, also read:

1. Customer due Diligence(CDD)- Individuals

2. The Know Your Customer (K Y C) Policy

3. Customer Due Diligence(CDD): Legal Entities

4. Transaction Monitoring

Anti-Money Laundering/Combating Financing Terrorism(AML/CFT)

Anti-Money Laundering(AML)/Combating Financing Terrorism(CFT) - India in the Global Context