The Reserve Bank of India (RBI) has asked banks and regulated entities to adopt a risk-based approach for periodic updation of KYC, a move that is set to tighten the customer due diligence norms.

The central bank has made amendments to the master direction on Know Your Customer (KYC). The changes also deal with the requirement of beneficial owner (BO) identification for ‘partnership firms’.

Regulated Entities (REs) have to undertake customer due diligence (CDD) as per the process for their customers.

The amendments follow the latest government instructions related to the Prevention of Money-Laundering Rules, Unlawful Activities (Prevention) Act (UAPA), and Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act.

The Reserve Bank said it has also updated certain instructions in accordance with the FATF recommendations.

The latest master directions said the risk-based approach for periodic updation of KYC has been amended to be read as: "REs shall adopt a risk-based approach for periodic updation of KYC ensuring that the information or data collected under CDD is kept up-to-date and relevant, particularly where there is high-risk".

It further said the instructions on opening accounts and monitoring of transactions should be strictly adhered to, in order to minimise the operations of "Money Mules", which are used to launder the proceeds of fraud schemes (like, phishing and identity theft) by criminals, who gain illegal access to deposit accounts.

"Banks shall undertake diligence measures and meticulous monitoring to identify accounts, which are operated as Money Mules and take appropriate action, including reporting of suspicious transactions to FIU-IND," according to the amended master direction.

It also widens the definition of CDD. It also fine-tuned the definition of Customer Due Diligence (CDD). This would cover the identification of the customer and verification of their identity using reliable and independent sources. REs would have to obtain information on the purpose and intended nature of the business relationship.

REs and concerned officials will now have to take reasonable steps to understand the nature of the customer's business, and its ownership and control structure. They will have to determine whether a customer is acting on behalf of a beneficial owner and identify that beneficial owner. Steps needed to be taken to verify the identity of the beneficial owner, using reliable and independent sources.

The Reserve Bank said the amended provisions in the master direction will come into force with immediate effect.