I think at this point, everyone is familiar with the concept of KYC or Know Your Customer in various fields at different points in our life.
In 2002, the Reserve Bank of India, or RBI, the central authoritarian bank for the government of India, introduced the KYC guidelines directed towards all the banks to comply with before December 31, 2005. But the question that might be on many people’s minds is, what is KYC anyways?
KYC or Know Your Customer is what it says it is. It was introduced for businesses and banks to verify the identity of the people they are working with.
KYC’s main reason for being was to stop the increase in the financial crimes that were occurring in the economy. These included corruption, money laundering and terrorist financing.
KYC also evolved into being a vital combat tool to counter illegal transactions in the field of international finance, as well as protecting clients, banks and financial institutions and allowing them to get involved in legal business activities while also protecting those harmed by financial crimes.
But how can KYC or its applications affect you as a consumer audience or someone who is getting into business life? How does KYC act as a gateway for the world of Finance? Let’s talk about that.
As a consumer:
As a consumer, you aren’t affected by KYC in your day to day life. For you, it can be a one-time process to identify and verify your identity to the party you are entering into a transaction with.
All you have to do is supply the verification party with your identity, either in an electronic or physical form, names, birthdays, social security numbers depending on the country you live in and the address of your residence.
This helps the financial institutions to prove that you are a legal and valid party to enter into a transaction with, with little to no risk of being involved in financial crime.
As a Business:
As a business, it is highly important to get into a legal transaction with a party that is reliable and not likely to get you caught up in a court case.
Financial institutions look into the lists of individuals and compare them to a list of suspects that can be involved in crime, at risk of taking bribery or can be involved in money laundering.
They also look into a list of Politically Exposed Persons or PEP lists. This is done to evaluate how much the client is likely to commit a financial crime such as being part of corruption or illegal activities.
These banks then also do a future prediction based on the trajectory of the account in place, where the activities of the client can be monitored more precisely and make sure nothing out of place appears on their account.
Doing this for even one person can help the financial institutions make assessments and comparisons to his/her peers as well. For example, if a bank has a couple of clients with similar jobs and similar backgrounds they come from, their accounts will look similar.
Effect on the Financial World
As we saw that KYC was introduced to make transactions safer, it has an even bigger role in increasing safety in the financial market. KYC is used to prevent/limit the cases of tax evasion, money laundering and fraud.
SEBI or the Securities and Exchange Board of India made it easier to invest in the Indian Stock Market or the securities market with the help of a variant of KYC called CKYC which just enlarges to Common Know Your Customer.
Once completed with the process of verifying yourself with the financial institutions, you can buy or sell any securities in the securities market.
Conclusion
KYC was introduced in 2002 to reduce the cases of financial crime and to increase the safety of transactions between 2 parties whether it be 2 businesses or a business and a customer.
This way there are lesser risks of getting into business with the probability of committing crimes such as fraud, tax evasion, money laundering etc. This has tremendously helped the financial institutions as well as customers to not fall into a trap of crime, and help carry out safer transactions in their day to day life.
Written By- Mohammad Arbaz Jalees
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