This lesson examines the foundational processes of verifying customer identity and assessing risk at onboarding and throughout the lifecycle of a retail banking relationship.
6.1 The Foundations of KYC and CDD
“Know Your Customer” (KYC) and Customer Due Diligence (CDD) are the cornerstones of any retail bank’s anti-money laundering (AML) and financial crime prevention framework . These processes are a legal and regulatory requirement designed to prevent banks from being used to launder money, finance terrorism, or perpetrate fraud. The core objective is to identify the customer, verify their identity, and understand the nature and purpose of the banking relationship .
6.2 Key Components of the CDD Process
The CDD process in retail banking is a systematic and risk-based procedure :
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Customer Identification Program (CIP): Collecting and verifying basic identifying information—name, date of birth, address, and identification number (e.g., national ID, passport, or driver’s license) .
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Beneficial Ownership Identification: For legal entities, identifying the natural persons who ultimately own or control the account .
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Risk Assessment: Categorizing customers as low, medium, or high risk based on factors like their occupation, country of residence, transaction patterns, and relationship type .
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Ongoing Monitoring: Continuously reviewing transactions and updating customer information to ensure it remains current and to detect suspicious activity .
6.3 Enhanced Due Diligence (EDD) and Simplified Due Diligence (SDD)
A risk-based approach dictates that not all customers require the same level of scrutiny :
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Enhanced Due Diligence (EDD): Applied to high-risk customers, such as Politically Exposed Persons (PEPs) or those from high-risk jurisdictions. EDD requires additional information gathering and a more rigorous assessment .
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Simplified Due Diligence (SDD): May be applied to low-risk customers where identity verification can be streamlined, in line with recent FATF updates promoting financial inclusion .
6.4 Regulatory Sanctions and Screening
A critical element of KYC/ CDD is the mandatory screening of customers against global sanctions and watchlists . This ensures the bank does not engage in business with individuals, entities, or countries subject to sanctions. Failure to perform these checks can lead to severe regulatory fines and reputational damage.