When should a bank apply customer due diligence?

Customer Due Diligence has been designed to control money laundering and to comply with the Know Your Customer (KYC) initiative. It helps the banks and other financial institutions know their customers better by assessing their risk factors, verifying the customer’s claims about who he is, confirming that he is not in the prohibited list, etc. In other words, we can say Customer Due Diligence (CDD) is basically the background check of the customer before bringing him on board. But when should a bank apply customer due diligence?

Well, banks apply customer due diligence when they have to approve loan amounts for businesses, and individuals. The process is usually conducted to determine the loan repayment ability, creditworthiness, to detect frauds and unfair activities such as money laundering. Banks enter into relationships with their customers. It can be a long term relationship or a one-off transaction.

To assess their risk profile and verify their identity, CDD is conducted.

When documents provided by the customer are unreliable and the bank has doubts,

Customer Due Diligence (CDD) must be conducted.

Customer Due Diligence (CDD) involves various regulatory obligations, which are as follows:

• Customer identification process is very important. For this, the customer's name, address, photo identification, birth certificate from reliable sources must be obtained.
• Beneficial ownership must be identified, which must include the understanding the control structure of the company.
• Nature of the business relationship and its purpose must also be identified.

I hope now you know

when should bank apply customer due diligence and what are the obligations that they follow.