When Should a Bank Apply Customer Due Diligence in India?
When you open a bank account or apply for financial services, you might wonder why the bank asks for so much personal information. Well, that’s because banks have an important responsibility to ensure that they are doing business with legitimate customers and not unknowingly facilitating illegal activities like money laundering or terrorism financing.
To achieve this, banks employ a process called Customer Due Diligence (CDD), which involves verifying the identity of their clients. Let’s delve into what CDD is and when it should be applied to ensure safe client onboarding.
What is Customer Due Diligence (CDD)?
Customer Due Diligence is a crucial process that banks and financial institutions carry out when they establish a relationship with a new customer or update information for an existing one. The goal is to know who their clients are, understand their financial activities, and assess the risks associated with serving them. By conducting CDD, banks can better protect their customers and themselves from potential financial crimes.
When Should a Bank Apply Customer Due Diligence?
Customer Due Diligence (CDD) is a crucial process that banks in India must follow to know their customers better and mitigate risks associated with financial transactions. Implementing CDD helps ensure that banks operate with transparency and comply with regulatory requirements. Let’s explore when banks should apply Customer Due Diligence and its significance in simple terms.
Account Opening
When you apply to open a new bank account, you will go through the CDD process. The bank will request specific documents to verify your identity, such as government-issued identification (e.g., passport or driver’s license) and proof of address (e.g., utility bill). These documents help the bank ensure that you are who you say you are and that you are not using the account for illicit purposes.
High Value Transactions
If you engage in a substantial transaction, either in cash or electronic transfer, the bank may conduct CDD to understand the source of funds and the reason for the transaction. This helps the bank identify any unusual or suspicious activities that may require further investigation.
Unusual or Suspicious Activities
Suppose you suddenly start making transactions that are unusual compared to your regular banking behavior. In that case, the bank may trigger CDD to verify if the activities are legitimate or if there might be potential risks involved.
Foreign Transactions
For cross-border transactions, especially involving high amounts, banks apply enhanced due diligence to ensure compliance with international regulations and to mitigate risks related to money laundering and terrorist financing.
Politically Exposed Persons (PEPs)
When dealing with individuals who hold prominent public positions or are associated with high-risk positions, such as government officials or their family members, banks apply heightened CDD measures to prevent corruption and illicit financial flows.
Conclusion
Customer Due Diligence is a vital process that banks undertake to know their customers better and safeguard the financial system from potential risks. By applying CDD at different stages of a banking relationship, banks can ensure that they are serving legitimate customers and complying with anti-money laundering and counter-terrorism financing regulations. So, the next time you encounter the CDD process at a bank, remember that it’s all about making the financial world safer for everyone.
CA Mayur Joshi is award winning fraud examiner and foremost forensic accountant. He is regularly quoted in various news papers and is author of atleast 7 books on Forensic Accounting, Money Laundering and Compliance.
Originally published at https://indiaforensic.com on October 25, 2015.
