Introduction of Digital KYC for verification by banks and intermediaries
The Ministry of Finance on August 19, 2019 released the Prevention of Money-Laundering (Maintenance of Records) Third Amendment Rules, 2019 (“Amendment Rules”). The Amendment Rules have amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“Rules”). Section 12 of the Prevention of Money Laundering Act, 2002 (“Act”) makes it mandatory for every ‘reporting entity’ to maintain records of all transactions and store information about their clients.
A ‘reporting entity’ means a banking company, financial institution or an intermediary. An intermediary means a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with the securities market.
Rule 9 of the Rules require a reporting entity to verify the information of its clients. The Amendment Rules have introduced “Digital KYC” for reporting entities. “Digital KYC” means the capturing live photo of the client and officially valid document or the proof of possession of Aadhaar, where offline verification cannot be carried out, along with the latitude and longitude of the location where such live photo is being taken by an authorised officer of the reporting entity.
The Amendment Rules have made Aadhaar a valid document for verification of individual clients. However, the Aadhaaar can only be used for verification if (i) the client is desirous of receiving any benefit or subsidy under any scheme notified under section 7 of the Aadhaar (Targeted Delivery of Financial and Other subsidies, Benefits and Services) Act, 2016 (18 of 2016); or (ii) the client decides to submit his Aadhaar number voluntarily to a reporting entity. Only proof of possession of Aadhaar will be required in case of offline verification.
Also, The Amendment Rules have allowed use of “equivalent e-documents” for digital verification. “Equivalent e-documents” are defined as a document, issued by the issuing authority of such document with its valid digital signature including documents issued to the digital locker account of the client as per Rule 9 of the Information Technology (Preservation and Retention of Information by Intermediaries Providing Digital Locker Facilities) Rules, 2016. A few examples of equivalent e-documents are Digital Aadhaar Card or a driving license stored on digilocker.
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The Amendment Rules will give way to banks to digitally record and store client data over a secured application. This will be beneficial for banks and other intermediaries as they will have an option to not maintain physical records, helping them reduce the financial burden and risk of preserving and protecting physical records. This will help banks and other intermediaries to carry out verification in remote areas where physical verification is not possible, this will help increase financial inclusion. Also, this will make access to information easier for both investigating authorities and banks as records will be available on a digital platform.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.