RBI amends its KYC rules to strengthen Money Laundering Prevention

The Reserve Bank of India (RBI) has amended its master directions on Know Your Customer (KYC) for regulated entities to incorporate amendments to the Prevention of Money Laundering rules. These amendments also address the requirement for “partnership firms” to identify beneficial owners (BOs).

The revised standards clarify the role of principal officers (PO) in regulated entities (RE) who are in charge of providing information. The term “Principal Officer” now refers to an officer at the management level nominated by the RE.

It also refined the concept of Customer Due Diligence (CDD). This would include identifying the customer and verifying their identity through reliable and independent sources. REs would need to learn about the purpose and nature of the business relationship.

Now, REs (Regulated Entities) and other concerned parties must take reasonable steps to understand the nature of the customer’s business, as well as its ownership and control structure. They’d have to figure out if a customer is acting on behalf of a beneficial owner and who that beneficial owner is. The RBI stated that they would be required to take all steps necessary to verify the identity of the beneficial owner, using reliable and independent sources.

The definition of “Ongoing Due Diligence” has been changed to require REs to ensure that transactions in the account are consistent with REs’ knowledge of the customers, their business and risk profile, and the source of funds or wealth.

Via issuing Press Release RBI said:

Refer to the Master Direction (MD) on KYC dated February 25, 2016, as amended from time to time, in terms of which Regulated Entities (REs) have to undertake Customer Due Diligence (CDD), as per the process laid out therein, for their customers.

In this regard, on a review, it has been decided to amend the MD on KYC to:

(a) Update certain instructions considering amendments to the PML Rules vide Government notifications dated September 4, 2023 and October 17, 2023;

(b) Update Annex II of the MD considering the changes to Government of India Order related to Unlawful Activities (Prevention) Act (UAPA), 1967, vide corrigendum dated August 29, 2023;

(c) Update Annex III of the MD by replacing the Government of India Order dated January 30, 2023, related to Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (WMD Act, 2005) with the Government of India Order dated September 1, 2023 (which has been issued by the Government in suppression of the earlier WMD Act Order dated January 30, 2023), on the matter;

(d) Update certain instructions in accordance with the FATF Recommendations;

(e) Add a new Section 55A, on FCRA, in the MD on KYC; and

(f) Update certain other instructions post review.

The changes carried out in the MD in this regard are provided in Annexure.

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