The Reserve Bank of India has issued 'know your customer' guidelines for non-banking financial companies, which are similar to those for commercial banks.

The board of directors of NBFCs have been advised to formulate policies and procedures to operationalise and ensure the observance of these guidelines, which come into immediate effect, in respect of all new customers, the bank said.

NBFCs have also been asked to complete the identification process in respect of the existing customers by June 30, 2004.

These guidelines, the RBI said, would be applicable to all NBFCs, including Miscellaneous Non-Banking Companies (chit fund companies) and Residuary Non-Banking Companies.

The RBI said that the guidelines have been reviewed in the context of the provisions of the Prevention of Money Laundering Act, 2002 and the need to put in place systems and procedures to help control financial frauds, identify money laundering and suspicious activities.

These guidelines aim at safeguarding NBFCs from being unwittingly used for transfer or deposit of funds derived from criminal activity or for financing of terrorism. The guidelines are also applicable to deposits accepted from NRIs.

Guidelines for new deposits

• Customer identification: 'Know Your Customer' (KYC) should be the key guiding principle for identification of an individual / corporate customer (depositor or borrower).
• Accordingly, the KYC framework should have two-fold objective, (i) to ensure customer identification and verifying his identity and residential address; and (ii) to monitor transactions of a suspicious nature.
• NBFCs should ensure that the identity of the customer, including beneficial owner is done based on disclosures by customers themselves.
• Typically easy means of establishing identity would be documents such as Permanent Account Number (PAN), ration card, driving licence, Election Commission's identity card, passport, et cetera in case of individuals and registration certificate, partnership deed/agreement, et cetera and other reliable documents in respect of companies, firms and other bodies.
• Verification through such documents should be in addition to the introduction by a person known to the NBFC.

Procedures for existing customers

• In respect of existing customers, NBFCs should ensure that gaps and missing information in compliance of KYC guidelines on customer identification procedure is filled up and completed before June 30, 2004.

Ceiling and monitoring of cash transactions

• NBFCs would normally not have large cash withdrawals and deposits.
• However, wherever transactions of Rs 10 lakh (Rs 1 million) and above are undertaken, they should keep record of these transactions in a separate register maintained at branch, as well as at Registered Office.
• Such information should be made available to regulatory and investigating authorities, when demanded.

Guidelines and monitoring procedures

• The board of directors of NBFCs should formulate policies and procedures to operationalise the guidelines and put in place an effective monitoring system to ensure compliance by their branches.
• Early computerisation of branch/office reporting will facilitate prompt generation of such reports and monitoring.

Internal control systems

• Duties and responsibilities should be explicitly allocated among the staff for ensuring that policies and procedures are managed effectively and that there is full commitment and compliance to an effective KYC programme in respect of both existing and prospective customers/clients.

Internal audit/inspection

• Internal auditors must specifically scrutinise and comment on the effectiveness of the measures taken by branches / offices of NBFC in adoption of KYC norms and steps towards prevention of money laundering.
• Specific cases of violation should be immediately brought to the notice of head / controlling / registered office.

Record keeping

• NBFCs should prepare and maintain proper documentation on their customer relationships and cash transactions of Rs 10 lakh and above.
• The records of all such transactions should be retained for at least ten years after the transaction has taken place and should be available for perusal and scrutiny by audit functionaries as well as regulators and law enforcement authorities; as and when required, at the branch as well as at registered office.

Training of staff and management

• It is important that all the operating and management staff is made fully aware of the implications and understand the need for strict adherence to KYC norms.
• NBFCs may take suitable steps to impart training to their operational staff on anti-money laundering measures.

These guidelines have been issued under Sections 45K and 45L of the RBI Act, 1934 and any contravention of the same will attract penalties under the relevant provisions of the Act, the RBI said.