A current account savings account (CASA) is a combination of the features of savings and current accounts. It enables customers to keep their money in the bank. It provides very low or no interest on the current account. For savings accounts, banks provide an above-average rate of interest.. A CASA functions like a normal bank account where funds may be withdrawn at any time.
Most banks provide CASAs to their clients for free. In some cases, a small fee may be levied, based on certain minimum or average balance requirements. A CASA tends to be a cost-effective method for a bank to raise money. This is a more suited alternative to issuing term deposits like fixed deposits (FD). FDs offer higher interest rates to customers.
Financial institutions prefer the use of a CASA as it generates more profits. The interest paid on the CASA deposit is less than on a term deposit, the bank’s net interest income (NII) is higher. Thus, CASAs can be an effective source of funding for banks.
Banks and regulators have focused on eradicating terrorist funding and money laundering. The objective is to prevent financial terrorism related activities. It’s impossible to transfer funds around the world and within a country without using a financial institution. As such, banks have increased their efforts to prevent, detect and report suspicious transactions. These include financial transactions that are connected with money laundering and terrorist financing. Know Your Customer (KYC) regulations are a critical component to anti-money laundering efforts.
Need For KYC In CASA WorldWide
As per RBI regulations on KYC, the objective of KYC/AML-CFT guidelines is to protect banks or Financial Institutions (FIs). This prevents them from being used by for money laundering or terrorist financing activities. KYC procedures also enable banks and FIs to know and understand their clients. This helps in their financial dealings better, and so manage their risks prudently.
KYC is a fundamental part of the banking process. KYC regulations are non-negotiable and non-optional. This applies to retail banking as well as corporate banking,
In simple terms, KYC in CASA involves four essential steps:
- The customer identity: This can be Individual, Partnership, Sole Proprietorship Firm, Company, or LLP
- The business’ address: The registered address where business activities are being carried out. For instance offices, factories, depots, or warehouses
- Statutory registration: The business is compliant with various statutory registrations under RoC, Income Tax, GST, etc
- The legality of the business: Whether the business is legal as per Indian laws.
The KYC process is elaborate and time-consuming. This is because it involves a lot of documentation, compliance checks, and background verification. The process can take 2–3 weeks to be completed and also imposes an enormous cost to banks and FIs.
Although it is a legal mandate for banks and FIs, conventional KYC methods provide a miserable experience for customers. Banks and FIs have switched to technology to enhance the KYC processes. Ideally, customer interaction and contact is barely needed for KYC. This is due to the fact that most data are available on the public domain. Asking the customer to submit the same data inevitably delays the process.
In 2016, the U.S. government passed a rule which mandates banks to verify the identities of beneficial owners of legal entity clients. These include corporations, LLCs, partnerships, unincorporated non-profits and statutory trusts. Beneficial owner information is necessary for an individual. This is applicable for individuals with an ownership stake of 25 percent or more equity interest.
If you’re a beneficial owner of a legal entity, the following personal information must be furnished that includes:
• Full legal name
• Date of birth
• Current residential address
• Social security number (SSN) or other government issued identification number for US citizens
Banks and other financial institutions must procure this information. This is because it’s a regulatory compulsion. It attempts to prevent, detect and report money laundering and terrorist financing activity.
For instance, while opening a new account and collecting key KYC information, a bank may find through open source record checks that an individual/business had defrauded innocent investors previously, or was part of a global criminal network. This information may hint that this potential client could be an elevated money laundering risk.
Over the past few years, there have been several high-profile cases of alleged money laundering. These have increased the attention of the general public and regulators alike. This has subsequently been a result of the penetration of illicit funds and fraud into European societies. Existing AML requirements are continuously adjusted to better prevent such tactics.
The evolution of customer expectations is adding higher imposition on organizations. Delivering seamless, fully digital and mobile experiences is becoming compulsory. The unprecedented situation that has been inflicted by the coronavirus pandemic in 2020 is an added setback. This is also setting new standards on the pace of digital transformation in KYC compliance.
To address these challenges, the EU has introduced a number of more stringent financial regulations over the last few years. This is to potentially tighten the enforcement powers across the bloc. — the European Commission’s Action Plan released in May 2020.
The extensive penetration of money laundering practices can be seen in European societies. News stories such as the Panama and Paradise Papers is critical in this context.
A number of regulations have been mandated to address the general issues. This is done on the basis of the challenges which the financial sector had undergone for the previous ten years. In particular:
- The Fourth, Fifth & Sixth Anti-Money Laundering Directive (AMLD4, 5 & 6) are aimed at counteracting the extensive penetration of money laundering in the societies. This can be done by introducing more thorough checks. Moreover, better cooperation between countries, as well as harsher criminal liabilities are crucial.
- The Payments Services Directive (PSD2) entices customer-centric innovation in the banking world. The focus is on preventing payment fraud and misuse of electronic financial tools;
- The updated Markets in Financial Instruments Directive (MiFID II) is another important regulation. It is driven by the necessity for more transparency in financial investment operations;
- The General Data Protection Regulation (GDPR) was the EU’s response to the general public’s request. It was passed to regain control over personal data and identity.
KYC Methods In CASA For Banks
For framing KYC policies, banks must follow the RBI guidelines. Every bank, has to consider the following major aspects:
a) Customer Acceptance Policy–
To make sure that explicit guidelines are applicable to the acceptance of customers.
b) Customer Identification Procedures–
To efficiently identify the customer. This helps to verify his/her identity. This can be done with reliable, independent methods of documents, data or information.
c) Monitoring of Transactions– This policy observes the standard activity of the customer. It can then mark transactions that fall outside the regular pattern of activity.
d) Risk management– Establish appropriate protocols as well as implicate their effective implementation.
As part of the Know Your Customer policy, a Customer/user may be defined as:
- A person or entity that possesses an account and/or maintains a business relationship with the banking institution
- The person on whose behalf the account is maintained (i.e. the beneficial owner)
- Beneficiaries of transactions which are carried out by professional intermediaries. These can be stockbrokers, Chartered Accountants, or solicitors etc.
- Any person or entity involved with a suspicious financial transaction. This can have significant impact on reputation or other risks to the banking institution. For instance, a wire transfer or issue of a high-value demand draft as a single transaction.
Going paperless — Digitization Of KYC
The immediate benefit of a paperless form of KYC is the decreased costs for performing KYC. Video KYC brings in the additional benefit of being completely remote. This is because digital KYC still requires a visit either to the customer’s doorstep or a touch point.
Video KYC in particular thus presents a significant advantage for achieving scale. It has become a crucial factor in the success of fintech initiatives for financial inclusion. This is primarily because it delivers a cheaper method for achieving compliance even in remote locations.
Several fintech companies have introduced new-age digital identity and authentication technologies. They serve the purpose of KYC compliance. These utilize Artificial Intelligence, Blockchain and cloud-based API technology, among many others. Some of these have already been applied in other sectors, like the use of video KYC to open mutual fund accounts.
The amount of data and related analysis projects a scope for new ways in which the data can be leveraged. Some instances include:
– New age risk mapping
– Using machine learning for false positive screening
– Using robotics for dealing with huge volumes of content and unstructured data
The scope for innovation has huge potential. It is a primary reason why the RBI’s regulatory sandbox has specified a focus on digital KYC technology. For starters, the Reserve Bank Of India should mandate digital KYC to become remote as well.
In the US, KYC started with the introduction of the Banking Secrecy Act (BSA) in 1970. This act was developed to control drug trafficking by keeping an eye on black money transactions. Subsequent AML regulations were developed on the basis of BSA in 2001 in the form of the USA Patriot Act which was implemented in 2003.
Later, following BSA, many other regulators introduced KYC and AML Regulations. This was done on regional and international levels.
Digitization of KYC — Major Amendments In Banking Regulations
As a measure to implement digitization of KYC, the finance ministry as well as RBI has introduced several amendments over the last 2 years. The Reserve Bank of India (RBI) acts as the regulatory authority for banking in India. The amendments also ensure that digitization of KYC meets regulatory requirements.
- In May 2019, RBI announced important amendments to the Master Direction on KYC. This included updating its list of documents eligible for the identification of individuals. The KYC details apply to banks and other regulated entities. It helps them understand their customers and their financial transactions better. This, in turn, helps them better manage their risks. As per the RBI notification. banks can carry out Aadhaar authentication/offline-verification of an individual. This can be done only when he/she voluntarily utilizes his/her Aadhaar number as ID.
- The Ministry of Finance (Department of Revenue) has introduced digital KYC by amending the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. It said in a gazette notification dated 19 August 2019. Digital KYC means capturing live photo of the client. It also captured officially valid documents. It also permits capture of Aadhaar for offline KYC verification. (To know more about the offline KYC rules, click here )
- In January of 2020, RBI amended the KYC norms allowing banks and other lending institutions to use VideoKYC. This move will help them onboard customers remotely. VideoKYC, which will be consent-based, will make it easier for banks and other regulated entities to adhere to the RBI’s KYC norms. (To know more about VideoKYC norms, click here )
Regulatory Authorities Around the Globe for KYC
The following highlights the major regulators around the world. They develop, recommend and implement KYC and AML compliance around the world:
FATF (Financial Action Task Force) is a global authority. It gathers and analyzes money laundering and terrorist financing data from across the globe. It gives regulatory guidelines based on its findings. It has 190 member countries.
FinCEN (Financial Crimes Enforcement Network) is a bureau of the USA treasury department. It collects the financial transactions data. It uses this data for financial crime mitigation and international level.
FINTRAC (Financial Transactions and Report Analysis Center) is a regulatory authority in Canada. It analyzes the financial crime data and works on the detailed implementation of KYC and AML rules in Canada.
FINMA is a financial regulatory authority in Switzerland. It oversees banks, insurance companies, stock exchanges, etc. The authority oversees KYC/AML regulations. This applies to all the institutions liable for regulatory compliance.
Europol is a EU authority that works on anti-money laundering and mitigation of financial crimes like terrorist financing.
Major updates in Global KYC/AML Laws
Amendments in Canada’s PCMLTFA rules
Canada introduced changes to its KYC and AML regimes to collaborate with the global regulations of FATF. It amended its PCMLTFA rules. FinTRAC, is responsible for the nationwide implementation of these rules. Digital KYC will be conducted in the manner of scanned copies of documents that can be used for KYC verification of the customers.
The USA expanding its Counter-Terrorism Powers
The USA has transformed its KYC rules to combat increasing money laundering and terrorist financing. It expanded its counter-terrorism powers. It now targets international financial institutions around the world. These culprits are responsible for aiding the terrorist groups working in the U.S. Recently it filtered three Korean groups. These are namely, Bluenoroff, Lazarus Group, and Andriel. They were responsible for the global cyber attacks on financial institutions.
UK MLA Amendments
The UK introduced amendments to its KYC and AML regulations to expand on an international level. The Money laundering Act (MLA-2017) allowed UK-based businesses to practice the MLA rules in their international affiliates.
The EU 5AMLD and 6AMLD
The EU introduced its Fifth Anti Money Laundering Directive (5AMLD) in 2018–19. 5AMLD limited the transaction and deposit limit on the prepaid cards. If the card holder will deposit or make a transaction of above EUR 150 the prepaid card provider will have to run KYC and AML on its customers. The amount is EUR 50 for online transactions.
6AMLD is an improved endeavour to normalize AML/CFT regulations in the EU region. 22 predicate offences are provided in the official journal of 6AMLD.
FINMA gave banking certificates to Crypto Banks
FINMA and Swiss regulatory authority issued banking certificates to pure-play cryptocurrency banks. Tight KYC and AML regulations are imposed on these banks.
Real KYC & VideoKYC For CASA
At Signzy, we have developed 2 proprietary Digital KYC products. They offer the perfect solution for onboarding savings and current accounts — Real KYC & VideoKYC. Here are some benefits:
- ‘Free of Cost’ Process: RealKYC verification is not liable to charge any extra amount to the customer. A company or institution may need to pay automation costs of installing verification systems for the long-run.
- Faster processing: The RealKYC service is an automated online process. This implies that KYC information can be transferred in real-time and does not require any manual intervention. The paper-based KYC process can be delayed for days and go up to weeks to get verified. Using the RealKYC process reduces this to just a few minutes to verify and issue.
- Account opening in less than 2 minutes: Signzy’s VideoKYC product is capable of onboarding a new CASA account in less than 2 minutes.
- End-to-end encryption for VideoKYC: This feature makes all calls made to officials for verification secure, with zero chance of your data being compromised.
Signzy is an AI-powered RPA platform for financial services. No matter how complex your workflow or operational complexity, Signzy is able to completely automate your back-operations decision-making process into a real-time API. This is possible due to a combination of Nebula — Our no-code AI model builder and our Fintech API Marketplace of over 200+ APIs. Today we work with over 90+ FIs globally including the 4 largest banks in India and a Top 3 acquiring Bank in US. Globally we have a strong partnership with MasterCard and offices in New York and Dubai to serve our customers in the 2 geographies. Our Product team of 120+ people is building a global AI product out of Bangalore.
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Author: Tathagata Chakrabarti
Bio: I am a Technical content writer who likes to talk about new innovations on banking, technology and other areas.