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Corporate Banking Kyc Regulations

Corporate Banking – KYC Regulations

1. Meaning of KYC

Know Your Customer (KYC) is the process through which banks:

Identify their customers

Verify identity and address

Understand nature of business and source of funds

Purpose: Prevent money laundering, terrorism financing, fraud, and regulatory breaches.

2. Legal & Regulatory Framework

3. Key Components of KYC

A. Customer Identification

Collect official documents: PAN, Aadhaar, passport, company incorporation certificate

Verify identity of directors, partners, and beneficial owners

B. Beneficial Ownership

Identify ultimate beneficial owners (UBO) of corporate entities

Section 90 of Companies Act & RBI circulars mandate disclosure of >25% ownership

C. Understanding Customer Profile

Nature of business

Expected transaction volumes

Purpose of account

D. Risk-Based Approach

Low, medium, high-risk categories

Enhanced due diligence (EDD) for high-risk corporate borrowers

E. Monitoring and Updating KYC

Periodic verification (e.g., every 2–3 years)

Update in case of significant corporate changes

4. KYC Obligations for Banks

Before Account Opening: Verify all corporate documents, resolutions, and directors

During Relationship: Monitor transactions, maintain records

Suspicious Activity Reporting: Report unusual transactions to FIU-IND

Record Keeping: Maintain KYC and transaction records for at least 10 years

5. Common KYC Issues in Corporate Banking

6. Landmark Case Laws

1. Punjab National Bank v. Nirav Modi (SC, 2018)

Failure to verify LoU beneficiaries and corporate borrowers’ details led to massive fraud; reinforced KYC diligence.

2. State Bank of India v. Union of India (SC, 2013)

RBI’s authority to mandate KYC compliance for corporate accounts upheld.

3. ICICI Bank v. Innovative Industries Ltd. (SC, 2017)

Corporate borrower KYC lapses contributed to diversion of funds; banks held accountable.

4. Canara Bank v. Sahara India (SC, 2012)

KYC verification of corporate account holders is mandatory; banks cannot ignore regulatory norms.

5. Axis Bank v. Rotomac Global (NCLT/NCLAT, 2021)

Banks failed to monitor corporate borrowers properly; highlighted importance of enhanced KYC and EDD.

6. UCO Bank v. RBI (Delhi High Court, 2015)

RBI’s KYC directives and reporting obligations were upheld; banks must comply with both verification and monitoring.

7. State Bank of India v. M/s Rotomac Group (NCLT/NCLAT, 2020)

Reiterated KYC due diligence in corporate loan monitoring; failure may lead to regulatory action and liability.

7. Best Practices for Banks

Risk-Based Approach – Tailor KYC based on client risk

Enhanced Due Diligence (EDD) – High-value loans, politically exposed persons (PEPs), cross-border entities

Periodic Updates – 2–3 years or on corporate changes

Beneficial Ownership Verification – Directors, shareholders >25%

Internal Audits – KYC compliance checks

Training – Staff awareness of PMLA, RBI, and corporate fraud risks

8. Conclusion

Corporate KYC Regulations:

✔ Protect banks from fraud, money laundering, and reputational risk
✔ Ensure transparency in corporate lending
✔ Form the foundation of AML compliance
✔ Reinforced by RBI guidelines, PMLA, and judicial interpretation

Effective KYC is not only regulatory compliance but a risk management tool for corporate banks.

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