Managing Anti-money Laundering With Customer Due Diligence

February 28, 2024
Managing Anti-money Laundering With Customer Due Diligence

Banks are subject to regulations that require them to prevent money laundering by implementing customer due diligence (CDD) and risk management. Knowing their customers and ensuring they won’t commit financial crimes might seem simple, but the formal processes require sophistication and attention to detail.

In this post, we’ll discuss what responsibilities banks need to uphold, the role of CDD in money laundering prevention, and how to implement an anti-money laundering (AML) policy. 

Understanding your anti-money laundering responsibilities

Banks and financial institutions are responsible for preventing CDD money laundering. In practice, this means identifying high-risk customers and taking proactive measures to ensure that their actual owners only use their accounts in legitimate ways.

Another key consideration is know your customer (KYC). Banks are responsible for collecting information about their customers to verify who they are and that they are who they claim to be. AML works with global KYC standards to ensure banks know their customers aren’t committing financial crimes.

The importance of CDD in identifying money laundering

CDD helps banks identify customers who might be involved in financial crimes. It is explicitly required by the Financial Industry Regulatory Authority (FINRA) AML rules, which state:

  • Financial institutions need an AML compliance program approved by a senior manager that governs CDD and related processes
  • Firms need to ensure they detect and report suspicious activity
  • Firms need to employ a risk-based Customer Identification Program (CIP)
  • Firms need to test their AML compliance program to confirm it works
  • Compliance officers must be registered in the FINRA Contact System (FCS)
  • Personnel involved in AML compliance must be provided ongoing training
  • Firms must conduct ongoing, risk-based customer due diligence

Furthermore, these are not the only applicable rules with respect to AML or CDD.

Two of the most important regulations related to CDD are the Bank Secrecy Act (BSA), including the CDD Final Rule, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act. Both apply to all banks, financial institutions, and related firms.

Alongside mandatory requirements, banks should also consider guidelines like the Financial Action Task Force’s (FATF) recommendations. A useful example is the FATF’s guidance on higher-risk customers, which includes specific metrics for risk (i.e., having 20 or more non- or partial-compliance instances in an evaluation).

What’s the difference between customer due diligence and enhanced due diligence?

All banks and financial institutions need to practice CDD for all incoming customers throughout the entire customer relationship. It’s essential to the relationship that it should be a default, bare-minimum practice.

Enhanced due diligence (EDD) is a practice that applies to higher-risk customers rather than the entire customer population. If a bank determines that an account carries over a certain risk threshold, it needs to apply additional scrutiny and risk management. More in-depth information and verification may be required. 

How CDD protects against financial crime

AML and CDD processes protect financial institutions by ensuring their account holders are who they say they are and carry an acceptable amount of risk. CDD requires detailed risk assessments that assign risk profiles or risk scores to customers based on their relative likelihood of committing financial crimes.

Risk factors considered range from personal details to transaction history.

One way to conceive of a customer due diligence checklist is to consider the various crimes CDD prevents—money laundering, fraud, terrorist financing, and many others. These can be the foundation of risk categories used for risk analysis.

How to create and follow an AML policy

For many financial institutions, a robust customer due diligence process that minimizes and addresses suspicious activity covers many of their AML bases. Formal policy requirements still need to be met, which can be challenging.

FINRA provides an AML policy template for small firms, which covers things like:

  • Specific language (and examples) to substantiate an AML policy
  • Guidance on AML compliance officer designation and duties
  • Prescribed processes for reporting to federal law enforcement
  • Guidance on using the Office of Foreign Assets Control Listings
  • Specific language (and examples) to substantiate a CIP policy
  • Guidance and prescribed language regarding the CDD Rule

Critical considerations for larger and more complex operations include accounting for risk monitoring infrastructure, recordkeeping, and delegating responsibilities.

Ongoing monitoring and risk assessments

Prior to activating an account, that customer’s identity needs to be verified. Then, analysis of the documents submitted creates that customer’s risk profile. But the process doesn’t end here—risk assessments need to be conducted throughout the entire duration of the financial institution’s business relationship with the customer.

Record keeping and transaction reporting

A critical part of monitoring and risk assessments is analyzing customer transactions to identify and address anomalies. If a customer’s account experiences a sudden or drastic change in behavior, it needs to be flagged as potentially higher risk. A greater degree of scrutiny must be applied to transactions and requests, and until the risk can be ruled out, limitations or seizure of account functions may be necessary.

Appointing an AML compliance officer

As detailed above, FINRA’s AML risk management rules explicitly require appointing AML compliance officers and registering them with the FCS. In some organizations, the designated AML compliance officer will report to the Chief Compliance Officer (CCO); in others, the CCOs take on the responsibilities themselves.

Smaller banks may outsource these responsibilities to third parties or augment their compliance capacities with AML compliance software.

The impact of technology on CDD and AML

Anti-money laundering and customer due diligence solutions allow organizations to automate some or all of their compliance management and customer relationships.

Another critical advantage of tech tools for AML and CDD is the flexibility to scale across different industry niches and locations. Banks can grow confidently, knowing that their CDD and AML processes can easily handle new regulatory contexts.

For example, ID verification and CDD rules in Indonesia’s financial sector are stricter than US-based equivalents. Additional information is needed (gender, marital status, etc.), and banks must use either document-based or real-time audio-video transmission verification. Automation helps banks meet these and other rules.

Banks and financial institutions must prevent money laundering and other financial crimes by knowing their customers, practicing due diligence, and implementing other policies to ensure compliance with interlocking regulations.

Microblink makes AML compliance easier with automated document capture and verification tools that streamline CDD, EDD, and general account management. Take control of your AML obligations today.

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