Customer Due Diligence for Banks: Risk Management and Compliance

March 14, 2024
Customer Due Diligence for Banks: Risk Management and Compliance

Banks of all stripes need to conduct customer due diligence (CDD) as part of their daily operations. Understanding who they’re working with and what their customers are doing is essential to protecting all stakeholders in the business relationship.

The two main reasons banks and financial institutions need to concern themselves with due diligence—and CDD specifically—are risk management and compliance. Through CDD, banks can assess the risks associated with their customers and take appropriate measures to mitigate them.

In this post, we’ll cover why CDD matters and how to implement it efficiently.

Why is due diligence important for banking?

Simply put, banks need to know their customers. They need to know who they are and that they’re representing themselves accurately. Banks also need assurance that customers aren’t using their accounts for criminal activities, like money laundering.

This applies to fintech firms and neobanks as well. The Federal Reserve publishes a guide on due diligence processes for financial technology, noting the challenges and urgency that come with the territory. Due diligence is especially critical because of the speed with which fintech can compile massive amounts of sensitive data.

The importance of CDD in risk management

CDD allows banks to assess and manage risk by creating risk profiles. Before taking on a client, the bank verifies and analyzes their information by comparing it against internal intelligence and industry-wide datasets.

These analyses create a risk profile or ranking that informs all elements of account management. For example, how much scrutiny is applied to transactions is proportionate to an account’s risk.

The importance of CDD in compliance

CDD is a requirement in several intertwined regulations applicable to banks, including:

  • The Bank Secrecy Act (BSA): The BSA prescribes several requirements that protect bank customers and prevent financial crimes. The CDD Rule expanded the scope of the BSA to explicitly require verification and ongoing monitoring.
  • The USA PATRIOT Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act is focused on exactly what its name says; it leverages CDD to prevent terrorist financing.
  • Know your customer (KYC) and anti-money laundering (AML): These are general standards that specific laws (see above) prescribe rules for. Organizations need to abide by BSA, PATRIOT, and other frameworks to meet them.

Understanding the CDD process flow

Given how critical CDD is to a bank’s risk-based approach and regulatory compliance management, it’s important to have an effective process in place. Every lead and customer needs to be verified and evaluated before—and after—they’re onboarded.

If you’re asking when KYC processes should be performed, it’s not one-and-done; they need to be ongoing throughout customer relationships with a financial institution.

That process generally includes all of the following stages.

Collecting customer information

Banks need to collect specific information from potential customers before opening their accounts. The Customer Identification Program (CIP) calls for:

  • An individual’s or business’s name
  • An individual’s date of birth
  • An address
  • An identification number, such as:
    • A taxpayer ID number
    • A passport or license number
    • A government photo ID number

These are the bare minimum pieces of information that must be present before an account is opened—a preliminary customer due diligence for banks checklist.

Verifying customer information and identity

Once information has been collected, banks need to verify that it is accurate and legitimate. The most important part of KYC ID verification is scanning documents submitted to ensure they’re not false. Digital scanners can compare ID cards, for example, against templates or databases to guarantee their authenticity.

Discrepancies between information on the documents and information submitted elsewhere (i.e., chosen names or outdated addresses) need to be flagged and reviewed. They may delay account creation or impact a customer’s risk profile.

Analyzing risk and assigning risk scores

Banks use it after collecting and verifying information to analyze an account and determine its risk. BSA risk assessment uses categories such as:

  • Risks of or related to money laundering
  • Risks of or related to terrorist financing
  • Risks of or related to account misuse

The relative likelihood that a customer’s account would be used for these determines their risk score, which is subject to change over time based on customer behavior.

Enhanced due diligence in financial services 

Enhanced due diligence (EDD) increases the CDD protocols for one or more customers because of greater risk, either actualized or suspected.

For example, if a bank’s standard KYC verification process suggests that a potential customer carries more risk than is expected or desired, the bank might collect more information from and on them than it does for other customers. It might require intensive document vetting or greater scrutiny when approving transactions.

Ongoing monitoring, investigation, and reporting

Importantly, identity verification for banks is not a finite process. Banks cannot just collect and verify customers’ information once at account startup. Instead, they must continuously monitor accounts and re-verify a customer’s identity.

This also includes monitoring account transactions and flagging any irregular or otherwise suspicious activity. A customer whose risk score is generally low might trigger re-classification if they start engaging in potentially risky behavior—for example, if an organization suddenly switches to cash transaction structuring.

What solutions are available for effective CDD?

Most banks rely on digital solutions for some or all aspects of CDD. The most effective tools tackle several steps at once or integrate seamlessly with a firm’s tech stack.

Some customer due diligence solutions banks should consider are:

  • Automated verification, aided by artificial intelligence (AI)
  • Tools for risk monitoring, analysis, and cross-channel alerts
  • Dynamic risk profiles that update automatically and in real-time
  • Transaction analysis tools that flag and address suspicious activity

In general, anything you can do to automate processes will benefit your CDD efforts.

Ultimately, meeting global KYC standards and other regulations can be challenging for many banks and financial institutions. Care and attention to detail throughout the process can strain internal resources and reduce bandwidth for other operations.

Microblink facilitates CDD with innovative, AI-driven solutions that automate ID capture, verification, and assist with ongoing risk monitoring. Our tools empower banks to maximize efficiency while minimizing friction for their customers.

Optimize your CDD processes with automation to take your risk management and compliance to the next level.

Integrate ID document scanning into your existing application today

Continue reading

Find more thoughts on the industry insights, use cases, product features, trends in AI, and development processes.

What is identity documentation verification and how does it work in finance?
ID and Document Verification

What is identity documentation verification and how does it work in finance?

August 31, 2023

Identity document verification ensures the authenticity of presented documents, which helps to mitigate the risk of fraudulen…

Upgrade your UX with ID document scanning for web browsers

Upgrade your UX with ID document scanning for web browsers

February 23, 2023

How easy is it for your customer to start utilizing your product or service? In an age with no abundance of time, no shortage…

Microblink’s top 5 blogs of 2022

Microblink’s top 5 blogs of 2022

December 28, 2022

What a year it has been.  For both our Identity and Commerce business units, 2022 was highlighted by growth, innovation…

Identity Document Scanning product updates – November 2022
Product Updates

Identity Document Scanning product updates – November 2022

November 22, 2022

Find out what’s new in the v6 release of Identity Document Scanning, and how the updates empower your solution and delight yo…

Blue in the face: Twitter’s vexing verification raises identity issue on social media
Social Media

Blue in the face: Twitter’s vexing verification raises identity issue on social media

November 17, 2022

In the Twittersphere, the term “verified” has progressively taken on a meaning of its own. It was back in 2009 when the socia…

Document Verification product updates – August 2022
Product Updates

Document Verification product updates – August 2022

August 10, 2022

Here’s a quick overview of all new features and supported documents in the latest version of Document Verification. Our…

Identity Document Scanning product updates – July 2022
Product Updates

Identity Document Scanning product updates – July 2022

July 31, 2022

We’re super excited to announce a new-better-than-ever version of Identity Document Scanning with 50 new identity docum…

Security by Design Meetup Recap

Security by Design Meetup Recap

May 21, 2024

Discover insights from the panel session on security by design and best practices. This blog post is a recap of our highly su…

How to Enhance Your Fraud Detection in Banking Transactions

How to Enhance Your Fraud Detection in Banking Transactions

May 13, 2024

Digital banking has completely revolutionized how we manage our transactions and accounts. However, with the ease and conveni…

Understanding Today’s US Online Gambling Laws
Online gambling

Understanding Today’s US Online Gambling Laws

April 26, 2024

Online gambling has been a popular pastime since its inception, but it soared to substantial new heights during the pandemic…