What rules must banks have to follow? Financial institutions need to be aware of who their clients are. For this, Customer due diligence is the term used. The regulators have created rules of CDD to prevent criminals from using banks badly. They want banks and financial companies to be transparent. CDD prevents evil elements from routing money using accounts. Businesses need to know their actual customers to catch terrorists or those who launder dirty money. It is also monitoring customers’ deals. This will discourage using banks illegally. It keeps financial systems safe for businesses as well as countries.
Know Your Customer Requirements
Knowing the customers is essential as a rule of CDD. Basic data regarding new clients is necessary for banks to have. This has been known as Know Your Customer. The banks follow a customer due diligence checklist. It asks for a customer’s name, residence, address, occupation, and proof of ID. According to the FinCEN of 2023 report, effective procedures for CDDs could curb financial crimes by up to 50%. This verifies who is the true customer. It prevents fraud and helps the CDD procedure.
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Screening against sanctions lists
During the Customer due diligence process, financial institutions ought to check the customer’s names against a list of sanctions on an ongoing basis. These checks are vital because in the year 2023, over 2,000 entities appeared on sanction lists globally, and this has made it a reminder of vigilance at the screen-checking stage. It ensures that thieves or terror groups do not knowingly use the bank services. It helps banks to stay compliant by obeying the regulations set forth in CDD. The process of CDD safeguards banks, customers, and the financial system from risks on sanctions lists.
Identifying beneficial owners
Banks must know the real owner of a company customer. There is one behind whom someone else can secretly benefit. He is called a beneficial owner. Banks use a checklist as part of the CDD to dig deeper. They find beneficial owners behind companies. 90% of money laundering cases include business organizations, according to FATF. It is necessary to try to identify beneficial ownership. This leads to preventing the misuse of banks by the bad guys without the knowledge of others in the CDD process.
Assessing politically exposed persons
CDD rules advise identifying VIP customers also. They are referred to as PEPs or politically exposed persons. PEPs are those who are performing duty at the top political positions. According to the Financial Action Task Force, the total identified PEPs all over the world increased by more than 30% in the last five years. Banks are careful with them. They carefully inspect the CDD checklist for any PEPs. They ensure safety, and no such unimplemented policies govern account handling.
Detecting suspicious transaction reports
CDD entails monitoring transactions for anything suspicious; scrutiny is carried out through the CDD checklist. Banks are mandated to submit suspicious activity on a confidential basis, thereby increasing the number reported above 1.2 million in 2023. This helps in investigations and also adheres to CDD regulations. It protects banks, clients, and financial systems against illegal practices while undertaking CDD.
Record keeping for due diligence data
The CDD records must be kept safe by the banks. This encompasses both what they obtain from the checklist and what they obtain themselves. Regulators may request that this information be viewed anytime. The Financial Crimes Enforcement Network, FinCEN, shows that banks are supposed to retain such information for at least five years following the closure of an account. Banks observe this rule by storing data for a certain time. This makes it possible to verify if banks indeed perform CDD correctly at any given time.
Staff training on compliance procedures
All banking staff have to be trained in the basics of Customer due diligence rules. The staff knows how to use the checklist correctly. They know when it is appropriate to monitor an account in relation to CDD. Training ensures that everyone treats CDD equally. This implies that the bank will not be in danger of CDD, nor will its clients. For 2023, more than 70% of financial institutions claimed “better” staff training in CDD rules dramatically reduced compliance risks.
Independent audits of the CDD program
External compliance officers check whether the banks perform CDD or not. They audit the CDD accounts and processes. This result reveals which areas need to be strengthened. According to the most recent statistics issued by FATF, an effective CDD procedure can reduce the risk of money laundering by up to 60%. This raises the bar further for protecting the financial system from the risks involved in the CDD regulation. Conduct an audit so that the banks can serve the customers well and responsibly in the near future. Money laundering and the funding of terrorism will end if banks strictly follow the regulations pertaining to customer due diligence. Contact us today to see how committed we are to compliance.