Know Your Customer

Know your customer

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Know your customer

KYC Policy:

1) Customer Acceptance
2) Customer Identification
3) Monitoring of Transactions
4) Risk Management
 
Definition of a Customer:

(i) A person or entity
(a)   Maintaining an account with the Bank, or
(b) Has a business relationship with the Bank (including borrowers/guarantors of loans, Demat account holders, locker holders etc.)
(ii) One on whose behalf the account is maintained (i.e. the beneficial owner)
(iii) Beneficiaries of transactions conducted by professional intermediaries   (such as Stock Brokers, Chartered Accountants, Solicitors, etc. if permitted under the law) and

  1. iv) Any person / entity connected with a financial transaction.

Customer Acceptance:

Branches should open accounts of only those persons whose identity can be verified. Thorough scrutiny of antecedents and present status should be ensured to find out :
(i)   if the accounts are in fictitious / benami name/s;
(ii)   whether the persons are having any connections with terrorist organizations.
(iii) whether the persons are with criminal background or were ever convicted
for offences relating to money laundering, terrorist activities, drug trafficking
etc.

  • Due Diligence must be exercised at the time of opening accounts.
  • Obtain necessary information to establish the identity, legal existence of each new customer based preferably on disclosures made by customers themselves.
  • Ascertain the purpose of opening the accounts and seek details of occupation and source and level of income to prevent misuse of the banking system for perpetration of frauds and money laundering.

Customer identification:

  • For identification of a customer, in addition to obtaining photographs, any of the photo identity documents mentioned below may be obtained.

–     Passport
–     Voter ID Card
–     PAN Card
–     Govt. Defense ID Card
–     ID Cards of reputed employers
–     Driving License
–     Utility Bills

  • Further, to verify the authenticity of the current address any of the following (latest / recent) documents should be perused and copy retained.

–     Credit Card Statement
–     Income/Wealth tax assessment order
–     Electricity bill
–     Telephone Bill
–     Bank account statement;
–     Letter from reputed employer;
–     Letter from any recognized public authority;
–     Ration Card

  • Branches should verify that the relevant details are incorporated in the documents being accepted for identification. If necessary, more than one of the above documents and additional documents, if need be, may be called for to establish the identity and correct address of the customer.
  • The officer scrutinizing the photo identity document/address document must satisfy himself about the prima facie authenticity by verifying the originals and authenticated photo copy of the same, which would be kept as branch record along with the account opening form. He should also ascertain that the photograph on Account Opening Form and Photo identify document pertain to the same individual.
  • In case of joint accounts, applicants who are not closely related to each other would require to establish their identity and address independently.
  • In case of Corporate and other legal entity customers the identity of all the signatories to be established as above, apart from obtaining details of its Registered Office and Business address. Relevant documents like Registration Certificate, Certificate of incorporation, Memorandum and Articles of Association and appropriate authorization for opening of account also to be obtained.
  • A letter of thanks should also be sent to the Account holder by post / courier to the recorded address, to ascertain the correctness of the address. If the letter is returned undelivered, the matter should be looked into.

What is Know Your Customer?

Know Your Customer (KYC) refers to the mandatory process organizations use to verify the identity of their clients. Whether you’re opening a bank account, investing in a mutual fund, or using a mobile SIM card, KYC ensures the company knows exactly who you are.

Why KYC Matters Today

KYC matters more today than ever before because fraud, identity theft, and financial crimes are increasing globally. KYC acts like a shield to protect both businesses and customers from unlawful activities.

Evolution of KYC: From Manual Verification to Digital Onboarding

Earlier, customers had to visit branches with physical documents. Today, advanced digital KYC uses video verification, AI, face-matching, and online document uploads.

Importance of KYC in Financial Systems

Fraud Prevention

KYC helps institutions verify whether a customer is using stolen identities, forged documents, or fake information.

Anti-Money Laundering (AML) Compliance

KYC is compulsory under international AML laws, ensuring customers do not use financial systems for illegal transactions.

Customer Risk Profiling

Banks assess whether customers are normal, medium-risk, or high-risk based on their financial behavior and background.

Global Regulations Driving KYC Requirements

Laws like FATF, GDPR, AMLD, and Patriot Act make KYC compulsory across the world.

Core Components of KYC

Customer Identification Program (CIP)

This step verifies the identity of the customer using documents like passport, national ID, or driving license.

Customer Due Diligence (CDD)

CDD includes verifying customer details and assessing potential risks.

Enhanced Due Diligence (EDD)

Used for high-risk customers such as politically exposed persons (PEPs) or those dealing with large international transactions.

Ongoing Monitoring

Banks must continuously track customer transactions to detect suspicious activity.

Types of Documents Used in KYC

Identity Proof

Examples:

  • Passport

  • National ID

  • Driver’s License

Address Proof

Examples:

  • Utility bill

  • Bank statement

  • Rental agreement

Income Proof

Examples:

  • Salary slips

  • Tax certificates

Biometric Verification

Used in modern KYC systems through fingerprint or facial recognition.

Digital KYC

e-KYC and Video KYC

Electronic KYC allows customers to submit documents online, while video KYC verifies customers through live video calls.

Benefits of Digital KYC

  • Faster processing

  • Lower cost

  • High accuracy

  • Better customer experience

Challenges in Digital KYC

  • Data privacy concerns

  • Technical issues

  • Documentation errors

KYC in Different Sectors

Banking

Mandatory for opening accounts, loans, credit cards, and investments.

Insurance

Required to prevent fraudulent claims and verify policyholders.

Mobile/Telecommunications

Used for SIM registration and safety.

Cryptocurrency Exchanges

Used to stop illegal crypto transactions and money laundering.

Common Challenges in KYC

Implementation

High Costs

Companies spend millions annually on KYC compliance.

Data Privacy Issues

Customer data must be protected from hacks and unauthorized access.

Human Errors & Inconsistencies

Manual KYC often leads to mistakes.

Customer Experience Barriers

Long KYC processes can frustrate customers.

Future of KYC

AI & Automation

Artificial intelligence verifies documents and matches faces instantly.

Blockchain for KYC

Blockchain provides a secure, tamper-proof system for storing customer details.

Cross-Border Standardization

Global KYC standards will make international banking easier.

100 MCQs with Answers 

1. What does KYC stand for?

A. Know Your Company
B. Know Your Customer
C. Know Your Country
D. Know Your Compliance
Answer: B
Explanation: KYC means Know Your Customer.

2. Why is KYC mandatory?

A. To increase sales
B. To prevent fraud and money laundering
C. To reduce paperwork
D. For customer satisfaction
Answer: B
Explanation: KYC is required under AML laws.

3. Which of the following is NOT a KYC document?

A. Passport
B. Electricity bill
C. Bank statement
D. Movie ticket
Answer: D
Explanation: Movie tickets do not prove identity or address.

4. Which step verifies a customer’s identity?

A. EDD
B. CIP
C. Monitoring
D. Compliance review
Answer: B

5. What does AML stand for?

A. Anti-Market Law
B. Anti-Money Laundering
C. Automated Money Ledger
D. Anti-Media Law
Answer: B

6. Which of the following is an example of identity proof?

A. Water bill
B. Passport
C. Rent receipt
D. Electricity bill
Answer: B
Explanation: A passport verifies identity.

7. Which department usually handles KYC in banks?

A. HR
B. Compliance department
C. Marketing
D. Sales
Answer: B

8. Enhanced Due Diligence (EDD) is required for whom?

A. Students
B. Politically Exposed Persons
C. Farmers
D. Low-income customers
Answer: B

9. What is the main goal of KYC?

A. Customer engagement
B. Prevent financial crimes
C. Increase bank profits
D. Reduce bank staff
Answer: B

10. Which technology is used in digital KYC for face matching?

A. Blockchain
B. AI
C. Newspaper
D. Telephone
Answer: B

11. Video KYC is mainly used to—

A. Advertise products
B. Digitally verify customers
C. Hire employees
D. Train staff
Answer: B

12. Income proof is used for—

A. Criminal verification
B. Transaction history
C. Loan eligibility
D. Address verification
Answer: C

13. Which of the following is part of CDD?

A. Risk profiling
B. Loan sanction
C. ATM withdrawal
D. Bill payment
Answer: A

14. SIM card registration uses KYC to—

A. Track call duration
B. Verify customer identity
C. Increase price
D. Sell more SIMs
Answer: B

15. AML laws are designed to stop—

A. Fake news
B. Illegal money activities
C. Students from studying abroad
D. Online shopping
Answer: B

16. Which is not part of KYC?

A. Customer verification
B. Risk assessment
C. Identity theft
D. Documentation
Answer: C

17. Blockchain KYC helps in—

A. Slowing processes
B. Creating fake IDs
C. Secure data sharing
D. Deleting customer accounts
Answer: C

18. Which document is accepted as address proof?

A. Gas bill
B. Movie poster
C. Restaurant bill
D. Cricket ticket
Answer: A

19. KYC is usually required during—

A. Pizza delivery
B. Bank account opening
C. Bus ticket purchase
D. Hotel booking
Answer: B

20. What is e-KYC?

A. Email verification
B. Electronic KYC
C. Entertainment KYC
D. Emergency KYC
Answer: B

21. The first step in KYC is—

A. Monitoring
B. Customer Identification
C. Credit scoring
D. Marketing
Answer: B

22. Which system stores biometric KYC data?

A. AI
B. Central database
C. Radio
D. Television
Answer: B

23. A PEP (Politically Exposed Person) is—

A. A sportsman
B. A politician or high-ranking official
C. A businessman
D. A student
Answer: B

24. KYC helps banks identify—

A. Criminal activities
B. Tourism
C. Food habits
D. Entertainment choices
Answer: A

25. A bank may freeze an account if—

A. Customer buys groceries
B. KYC is not updated
C. Customer travels abroad
D. Customer changes phone
Answer: B

26. CDD stands for—

A. Customer Document Delivery
B. Customer Due Diligence
C. Certified Data Department
D. Central Database Division
Answer: B

27. Digital KYC reduces—

A. Speed of verification
B. Errors
C. Efficiency
D. Customer satisfaction
Answer: B

28. Fraudulent accounts are prevented using—

A. ATM cards
B. KYC
C. Ads
D. Social media
Answer: B

29. Which example shows ongoing monitoring?

A. Tracking unusual transactions
B. Updating phone number
C. Changing address
D. Applying for a card
Answer: A

30. FATF is related to—

A. Food delivery
B. AML and KYC regulations
C. Online shopping
D. Entertainment
Answer: B

31–40 MCQs

31. What does CIP stand for?

A. Customer Identity Proof
B. Customer Identification Program
C. Central Identity Program
D. Critical ID Process
Answer: B

32. A bank checks transaction behavior under—

A. CIP
B. Ongoing monitoring
C. EDD
D. CDD
Answer: B

33. Which is NOT required for digital KYC?

A. Internet
B. Smartphone
C. Video call
D. Post office visit
Answer: D

34. Which of these customers need EDD?

A. Students
B. High-value traders
C. Senior citizens
D. New employees
Answer: B

35. The goal of risk profiling is—

A. Evaluate risk category
B. Print ID cards
C. Sell products
D. Close accounts
Answer: A

36. Address verification confirms—

A. Financial background
B. Where a customer lives
C. Educational history
D. Travel history
Answer: B

37. KYC is essential to prevent—

A. Tourism
B. Money laundering
C. Sports
D. Education
Answer: B

38. Which is a biometric method?

A. Signature
B. Fingerprint
C. Ink stamp
D. Passport number
Answer: B

39. KYC helps improve—

A. Customer trust
B. Car mileage
C. Internet speed
D. Food quality
Answer: A

40. Identity fraud occurs when—

A. Someone buys groceries
B. Someone uses another person’s identity
C. Someone opens a legal business
D. Someone changes password
Answer: B

41. What is the key purpose of Customer Identification Program (CIP)?

A. To check customer emails
B. To verify identity
C. To issue credit cards
D. To create advertisements
Answer: B
Explanation: CIP ensures the customer is who they claim to be.

42. Which sector most strictly enforces KYC?

A. Entertainment
B. Banking
C. Tourism
D. Retail
Answer: B

43. A utility bill is used as—

A. Identity proof
B. Address proof
C. Employment proof
D. Age proof
Answer: B

44. What is the biggest risk of no KYC?

A. Slow website
B. Fraud and illegal transactions
C. Higher interest rates
D. Fewer branches
Answer: B

45. KYC helps in building—

A. Customer relationships
B. Gym routines
C. Travel plans
D. Gardening tips
Answer: A

46. Which is NOT a stage of KYC?

A. CIP
B. CDD
C. EDD
D. Online marketing
Answer: D

47. Which KYC level is applied for high-risk customers?

A. CDD
B. EDD
C. CIP
D. FDD
Answer: B

48. Banks must report suspicious activity to—

A. Sports council
B. Financial Intelligence Unit (FIU)
C. National radio
D. Local market
Answer: B

49. e-KYC mainly requires—

A. Digital identity
B. Handwritten documents
C. Postal deliveries
D. Paper applications
Answer: A

50. KYC reduces—

A. Banking hours
B. Identity theft
C. Employee hiring
D. Marketing needs
Answer: B

51. Which customer is considered high-risk?

A. Fixed salary employee
B. Politically Exposed Person
C. School teacher
D. Student
Answer: B

52. The main reason for document verification is—

A. To increase costs
B. To confirm authenticity
C. To issue coupons
D. To promote products
Answer: B

53. A customer’s occupation is checked during—

A. EDD
B. Risk profiling
C. ATM use
D. Customer care
Answer: B

54. The purpose of AML rules is to stop—

A. Loans
B. Criminal money flow
C. Customer deposits
D. Internet use
Answer: B

55. Banks keep customer records for—

A. 1 month
B. 3 months
C. Several years
D. 1 day
Answer: C

56. Which department detects suspicious activities?

A. Security
B. AML/KYC compliance
C. HR
D. IT support
Answer: B

57. A customer must do re-KYC when—

A. Using ATM
B. Changing address
C. Watching movies
D. Buying groceries
Answer: B

58. High-value transactions require—

A. Only email verification
B. Enhanced scrutiny
C. Entertainment fee
D. Social media profile
Answer: B

59. Video KYC reduces—

A. Fraud
B. Internet usage
C. Customer visits
D. A and C
Answer: D

60. The final step of KYC is—

A. KYC approval
B. Loan distribution
C. Customer exit
D. Cash withdrawal
Answer: A

61. What is a common issue with manual KYC?

A. High accuracy
B. Low error rates
C. Human mistakes
D. Full automation
Answer: C

62. Digital signatures are used for—

A. Online verification
B. Offline shopping
C. Entertainment
D. Calling friends
Answer: A

63. Ongoing monitoring is required for—

A. ATM withdrawals
B. Identifying unusual patterns
C. Customer complaints
D. Profile picture updates
Answer: B

64. Which is the safest KYC method?

A. Verbal confirmation
B. Biometric verification
C. Handwritten forms
D. Postal mail
Answer: B

65. KYC ensures customer—

A. Identity
B. Age
C. Salary
D. Marital status
Answer: A

66. A customer failing KYC is considered—

A. Low risk
B. Unverified
C. Trusted
D. Eligible
Answer: B

67. “Beneficial owner” refers to—

A. Person receiving interest
B. Real owner of funds or account
C. Someone renting property
D. Someone working at the bank
Answer: B

68. Banks conduct EDD when they suspect—

A. Low balance
B. High risk
C. Small transactions
D. Bill payments
Answer: B

69. A national ID card proves—

A. Identity
B. Education
C. Occupation
D. Travel history
Answer: A

70. A bank account freeze may occur due to—

A. No KYC update
B. Shopping too much
C. Watching Netflix
D. Phone change
Answer: A

71. KYC laws are created by—

A. Fashion agencies
B. Governments & regulators
C. Schools
D. Restaurants
Answer: B

72. What is the main challenge in KYC?

A. Low compliance cost
B. Data privacy
C. No documentation
D. Simple processes
Answer: B

73. Cloud-based KYC stores data—

A. In online servers
B. In envelopes
C. In lockers
D. In bank branches
Answer: A

74. FIU stands for—

A. Financial Intelligence Unit
B. Financial International Union
C. Federal Internet Unit
D. Finance Information Utility
Answer: A

75. Risk scoring helps banks—

A. Give gifts
B. Identify customer risk levels
C. Promote offers
D. Schedule meetings
Answer: B

76. Who requires strict KYC verification?

A. Kids
B. Bank customers
C. Pets
D. Tourists
Answer: B

77. Which document is MOST reliable for identity?

A. Magazine
B. Passport
C. Train ticket
D. Internet bill
Answer: B

78. Non-compliance with KYC may result in—

A. Government penalties
B. Free bonuses
C. No effect
D. Discounts
Answer: A

79. Which technology prevents duplicate KYC?

A. Biometrics
B. Radio
C. SMS
D. Email
Answer: A

80. Customer Due Diligence includes—

A. Salary review
B. Risk evaluation
C. Video editing
D. Social media analysis
Answer: B

81. In banking, KYC is mandatory for—

A. Opening accounts
B. Buying snacks
C. Movie booking
D. Gym membership
Answer: A

82. A high-risk transaction could be—

A. Grocery purchase
B. Large international transfer
C. Monthly rent
D. Mobile recharge
Answer: B

83. KYC updates are usually required every—

A. 24 hours
B. Few years
C. 1 minute
D. 1 day
Answer: B

84. Which reduces identity theft?

A. Cash withdrawal
B. Strong KYC
C. Long queues
D. Phone calls
Answer: B

85. A customer’s signature is checked for—

A. Address proof
B. Identity verification
C. Travel history
D. Shopping lists
Answer: B

86. Which is a red flag in KYC?

A. Regular small deposits
B. Sudden large unexplained funds
C. Monthly salary credit
D. Utility bill payment
Answer: B

87. e-KYC is most beneficial because—

A. Slow
B. Fast and paperless
C. Expensive
D. Offline only
Answer: B

88. Banks monitor accounts to—

A. Track hobbies
B. Prevent suspicious activities
C. Recommend movies
D. Count customers
Answer: B

89. Identity fraud is reduced by—

A. AML rules
B. Poor KYC
C. Ignoring verification
D. Removing documents
Answer: A

90. KYC is required when applying for—

A. Passport
B. Loans
C. School exams
D. Sports events
Answer: B

91. Aadhaar/e-ID is used in which type of KYC?

A. Paper KYC
B. Digital KYC
C. Offline KYC only
D. Manual KYC
Answer: B

92. A customer’s risk level depends on—

A. Their favorite food
B. Income source
C. Phone model
D. Clothing brand
Answer: B

93. Which is an example of suspicious activity?

A. Monthly salary deposit
B. Multiple high-value cash deposits
C. Paying bills
D. Buying groceries
Answer: B

94. KYC verification ensures—

A. Correct customer identity
B. Discounts
C. Travel benefits
D. Entertainment
Answer: A

95. Duplicate identities are prevented by—

A. Biometrics
B. Email
C. SMS
D. Leaflets
Answer: A

96. A person who refuses KYC is—

A. Trusted
B. High-risk
C. Guaranteed safe
D. Eligible
Answer: B

97. Video KYC requires—

A. A live agent
B. A TV channel
C. A physical form
D. A postal service
Answer: A

98. KYC helps identify—

A. Criminals
B. Friends
C. Family members
D. Teachers
Answer: A

99. Banks use KYC mainly to—

A. Make money
B. Follow regulations
C. Advertise products
D. Hire staff
Answer: B

100. A strong KYC system must be—

A. Slow
B. Secure and accurate
C. Manual only
D. Expensive
Answer: B