Client Identification Procedure
Also written CIP · Client Identification Procedure (CIP) · Client identification
The written procedure each registered intermediary must frame and run to establish the true identity of a client — at onboarding, during transactions, and whenever earlier identification data is doubted.
In plain language
The Client Identification Procedure (CIP) is the intermediary's own rulebook for finding out who a client really is.
SEBI does not just ask for identification. It asks each intermediary to draw up and put in place its own CIP. The CIP must build in the PML Rules. It can also add any extra steps the intermediary thinks fit, to find the true identity of its clients. So two firms in the same business may follow different procedures, and both can comply. But a firm with no written procedure at all cannot comply.
The CIP is the identity part of client due diligence. It is also one of the four written anti-money laundering procedures that every registered intermediary must keep. The four are a policy for accepting clients, a procedure for identifying clients, risk management, and monitoring of transactions.
How it works
When CIP is carried out. At three points, not one:
- To establish the intermediary-client relationship
- While carrying out transactions for the client
- When the intermediary has doubts about the veracity or adequacy of previously obtained client identification data
What the procedure must contain. The SEBI guidelines require that the intermediary identify the client using reliable sources including documents and information; obtain adequate information to satisfactorily establish the identity of each new client and the purpose of the intended nature of the relationship; and hold information adequate enough to satisfy regulatory or enforcement authorities in future that due diligence was observed. Two operational rules follow from that:
- Each original document shall be seen prior to acceptance of a copy.
- Failure by a prospective client to provide satisfactory evidence of identity shall be noted and reported to the higher authority within the intermediary — not simply filed away as an abandoned application.
Politically exposed persons. The CIP must include a risk management system to determine whether a client, a potential client, or the beneficial owner of a client is a PEP — by seeking information from the client, referring to publicly available information, or accessing commercial electronic databases of PEPs. Senior management approval is required to establish a business relationship with a PEP, and again to continue one where a client is later found to be, or becomes, a PEP. The intermediary must also take reasonable measures to verify the source of funds and the source of wealth.
A worked example
Anvay Securities Ltd receives an account opening application from Mr R. Deshmukh, described as a management consultant, on 9 January.
Stage 1 — establishing the relationship. PAN is verified online at the Income Tax website. Proof of identity and proof of address are collected, and each original is seen before the copy is taken. IPV is done by an authorised person on 11 January and the name, designation, organisation, signature and date of the person doing it are recorded on the KYC form.
The PEP check. A commercial PEP database returns a match: the applicant is the son of a serving state minister. That is not a bar — but it makes the client a politically exposed person, and therefore a client of special category. Three consequences follow. Senior management approval is required before the relationship can be established. The source of funds and the source of wealth must be verified by reasonable measures. And the client goes into the high-risk category, attracting enhanced due diligence and more frequent KYC updates.
Stage 2 — during transactions. In March the client instructs a purchase of Rs 2.1 crore of listed equity. The declared net worth on file is Rs 40 lakh. CIP is triggered again, because the intermediary now has doubts about the adequacy of previously obtained identification data.
Stage 3 — the applicant who walks away. A second applicant the same week is asked for the original of his address proof, declines, and stops responding. The application cannot simply be closed: the failure to provide satisfactory evidence of identity shall be noted and reported to the higher authority within the intermediary, and an attempted transaction abandoned on being asked for documents is reportable in an STR even though it was never completed, and irrespective of amount.
Why NISM asks about it
Chapter 6 (SEBI Guidelines for AML, CFT and PF), section 6.2.3, is the CIP section, and the four written procedures come from section 6.2 immediately before it. Expect a question on the three occasions when CIP is carried out, the rule that each original must be seen before a copy is accepted, and — a reliable favourite — the requirement of senior management approval both to establish and to continue a relationship with a PEP.
Common exam traps
- CIP happens three times, not once. Onboarding is only the first; transactions and doubts about earlier data trigger it again.
- A PEP is not prohibited. The client can be accepted — with senior management approval, verification of source of funds and wealth, and enhanced due diligence. Answers that say "refuse the account" are wrong.
- The PEP test extends to the beneficial owner, not just the person signing the form.
- An abandoned application is still reportable. Registered intermediaries must report attempted transactions in STRs even if not completed by the client, irrespective of the amount.
- Copies are not enough. Each original document must be seen before its copy is accepted — which is also why "original seen and verified" has a specified digital equivalent in the online KYC route.
- Do not confuse CIP with KYC: KYC is the platform-wide documentation standard, CIP is the intermediary's own written procedure built on top of it.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- KYC Registration AgencyA SEBI-created agency that holds an investor's verified KYC record centrally, so that one KYC completed with any securities market intermediary works with all the others.
- Clients of Special CategoryA named list of client types — NRIs, HNIs, trusts, NGOs, PEPs, non-face-to-face clients and others — on whom SEBI requires enhanced due diligence rather than the ordinary standard.
- In-person verificationThe mandatory step in which an authorised official physically confirms that the person opening the account is the person in the KYC documents, and records who did it, when, and in what capacity.
- Client Due DiligenceScreening and verifying a client using reliable, independent sources — identity, beneficial owner, purpose of the relationship — and then continuing to scrutinise it for as long as it lasts.
- Politically exposed personsA higher-risk class of client that SEBI treats as a client of special category: the intermediary must detect them, obtain senior management approval to deal with them, and verify their source of funds and wealth.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
- Micro investmentMutual fund investments up to Rs 50,000 in aggregate under all schemes of a fund house, which an individual investor may make without a PAN — but never without KYC.
- Video In-Person VerificationIPV conducted over a live, recorded video interaction through the intermediary's own app — with informed consent, random questions, a liveliness check and a tamper-proof time-stamped recording.