Outline the recommended ways a bank should accept, identify and verify its customers.
The idea
Customer due diligence (CDD) has four parts. First, identify the customer and verify identity using reliable, independent source documents, data or information. Second, identify the beneficial owner, meaning the natural person who ultimately owns or controls the customer, and take reasonable measures to verify that person. This requires understanding the ownership and control structure of companies and trusts. Third, understand the purpose and intended nature of the relationship. Fourth, conduct ongoing due diligence. A bank's customer acceptance policy should be risk-based and require senior management approval for higher-risk customers such as politically exposed persons. It should not be so rigid that it shuts out financially or socially disadvantaged people. If CDD cannot be completed, the bank must not open the account or must end the relationship, and should consider filing a suspicious transaction report. Relying on a third party for CDD never moves ultimate responsibility away from the bank.
A practice question
When a bank verifies the identity of a new customer, it should use:
- Reliable, independent source documents, data or information. - correct
- The customer's own signed declaration of identity, supported by a copy of the declaration kept on file.Why not: Self-certification is not independent; verification needs a source other than the customer.
- The judgement of the relationship manager who meets the customer.Why not: Personal opinion is not documentary or data-based verification.
- A tax identification number supplied by the customer, accepted without further checks.Why not: A number given by the customer is an identifier, not an independently verified source.
CDD requires verification against reliable, independent sources, such as official identity documents or independent databases, not information supplied or vouched for only by the customer or by staff opinion.
A harder one
A prospective corporate customer cannot supply the documents the bank needs to identify its beneficial owners. What should the bank do?
- Not open the account or commence the relationship, and consider filing a suspicious transaction report. - correct
- Open the account with a low transaction limit and collect the missing documents within the following twelve months.Why not: Letting a relationship start with incomplete CDD is not allowed; limits do not cure missing identification.
- Open the account and record the customer as high risk until the documents arrive.Why not: A high-risk label does not substitute for completing CDD before the relationship starts.
- Open the account if a long-standing customer of the bank personally recommends the company to the branch.Why not: A recommendation is not verification of identity or beneficial ownership.
If CDD cannot be completed, the bank should not open the account or start the relationship (or should end it if already started) and should consider reporting the failure as a suspicious transaction.
The hardest tier
A new private banking applicant is the daughter of a serving minister in a country where the bank has identified corruption as a significant risk. Her identity is verified and her stated source of funds is a family inheritance. Which course is most consistent with recommended practice?
- Reject the application automatically, since close relatives of politically exposed persons cannot be accepted.Why not: Blanket refusal replaces risk management; such relationships can be accepted with enhanced measures.
- Accept her as a normal customer because her own identity has been verified and she holds no office.Why not: Ignores that close family members of politically exposed persons carry elevated risk requiring enhanced measures.
- Let the account officer approve the account, and verify source of funds for the first deposit only.Why not: Higher-risk customers need senior management approval, source of wealth as well as funds, and continuing enhanced monitoring.
- Treat her as higher risk: obtain senior management approval, establish source of wealth and funds, and monitor more closely. - correct
Politically exposed persons and their close family and associates are higher risk. The bank may accept them, but only with senior management approval, source of wealth and funds established, and enhanced ongoing monitoring.
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