KYC : It’s Significance, Functionality And Regulatory Legal Framework

Written by: Ashok N. Kotangle , Researcher , Department of Law, University of Mumbai

Abstract

Know Your Customer (KYC) is a regulatory, preventive, and risk-management framework adopted globally to verify customer identity, ensure financial transparency, and combat economic crimes such as money laundering, fraud, tax evasion, and terrorist financing. The concept, rooted in early foreign exchange regulations and strengthened after liberalization, has evolved into an essential compliance mechanism for financial institutions, banks, and digital platforms. KYC serves multiple objectives: safeguarding national and economic interests, promoting accountability, preventing misuse of financial systems, and aligning with international standards like those of FATF, IMF, and the UN.

The nature of KYC is multidimensional—administrative, legal, preventive, and regulatory—enforced through documentation norms, customer due diligence, and continuous monitoring. In India, its legal foundation stems from the Foreign Exchange Regulation Act (FERA), its successor FEMA, and the RBI’s Master Directions. Key judicial interventions, including Aadhaar cases (2017, 2019), the FinCEN v. Ripple Labs case (2015), and R. v. NatWest Bank (2021), demonstrate how courts have shaped the contours of customer verification, privacy, proportionality, and data usage. KYC also extends to digital payments, cryptocurrency transfers, and non-banking sectors under evolving jurisprudence.

By mandating identity validation, address proof, risk profiling, and transaction tracking, KYC helps institutions prevent fraudulent conduct, maintain data integrity, and ensure responsible financial participation. Overall, KYC has transitioned from a compliance formality to a core instrument of national security, regulatory governance, and global financial integration.

KEYWORDS: - KYC compliance, money laundering, RBI regulations, customer due diligence, financial fraud prevention

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