• 29 April 2025
• By Forensic Services India

When Should a Bank Apply Customer Due Diligence?

In today's fast-evolving financial landscape, Customer Due Diligence (CDD) isn't just a regulatory requirement—it's a critical aspect of trust, security, and transparency between banks and their clients. With rising risks of money laundering, terrorist financing, and other illicit activities, banks must be vigilant and proactive. But when exactly should a bank apply customer due diligence?

Let’s break it down, explore the different layers involved, and understand when enhanced due diligence becomes necessary.

What is Customer Due Diligence?

Customer Due Diligence refers to the process through which a bank or financial institution verifies the identity of its customers and assesses the potential risks associated with doing business with them. This involves collecting and analyzing basic identifying information such as:

• Full name
  
  
• Address
  
  
• Date of birth
  
  
• Nationality
  
  
• Nature of business or occupation
  
  

The primary goal of CDD is to ensure that banks understand who their customers are, the nature of their financial dealings, and the risks they may pose to the institution or the financial system as a whole.

When Should Customer Due Diligence Be Applied?

Banks are required to apply CDD in several specific circumstances. These are often mandated by anti-money laundering (AML) laws and international guidelines like those from the Financial Action Task Force (FATF).

1. When Opening a New Account

This is the most common scenario. Whether it's a savings account, checking account, loan, or investment account, the bank must perform CDD on every new customer before initiating any financial relationship. This is known as standard due diligence and involves identity verification, checking documents, and understanding the purpose of the account.

2. When Carrying Out Occasional Transactions Above a Threshold

CDD isn't just for new customers. Banks must also apply it to occasional or one-off transactions if they exceed a certain threshold—often set around $10,000 (or the equivalent in local currency). These transactions might be wire transfers, currency exchanges, or cash deposits.

3. When There is a Suspicion of Money Laundering or Terrorist Financing

Even if the transaction is below the normal threshold or involves a long-standing customer, CDD must be conducted if there is any suspicion of illicit activity. This aligns with the "know your customer" (KYC) principle.

4. When Customer Information Needs Updating

CDD is not a one-time task. It must be reviewed and refreshed periodically, especially when:

• A customer's behavior changes significantly
  
  
• Documents expire or are found to be inaccurate
  
  
• New risks emerge due to external events (e.g., sanctions, geopolitical shifts)
  
  

5. When the Nature of the Customer Relationship Changes

If a customer who previously only held a savings account now wishes to open a business account or begins transacting internationally, it might trigger a need for a fresh risk assessment. This often calls for enhanced due diligence.

What is Enhanced Due Diligence?

Enhanced Due Diligence (EDD) is a deeper, more thorough investigation into a customer's background, financial behavior, and source of funds. It is applied when the risk of money laundering or terrorist financing is higher than usual. The process often involves:

• More detailed verification of identity and documents
  
  
• Verifying the source of income and wealth
  
  
• Frequent transaction monitoring
  
  
• Seeking approval from senior management for onboarding

When is Enhanced Due Diligence Usually Required?

Enhanced due diligence is usually required for:

1. Politically Exposed Persons (PEPs)

These are individuals who hold prominent public positions or are closely related to someone who does. They are considered high-risk due to their potential influence and exposure to corruption.

2. Customers from High-Risk Countries

Countries that do not have strong AML regulations or are known for corruption, terrorism, or political instability warrant closer scrutiny. If a customer is based in or associated with such a region, EDD becomes mandatory.

3. High-Value or Unusual Transactions

Transactions that are large in value, have no clear business rationale, or seem inconsistent with the customer’s profile trigger EDD. For example, a student transferring large sums internationally without a legitimate explanation.

4. Anonymous or Shell Companies

Entities that obscure ownership, such as shell companies or those registered in offshore jurisdictions, often require enhanced checks to determine the real beneficiaries and the nature of business activities.

5. Crypto-Related Businesses

With the rise of digital currencies, banks must be extremely cautious while dealing with crypto exchanges, wallets, and other digital asset businesses. These sectors are inherently riskier due to their pseudo-anonymous nature and regulatory gray zones.

Why Customer Due Diligence Matters

Banks that fail to carry out proper due diligence risk more than just regulatory penalties. They may:

• Facilitate financial crimes unknowingly
  
  
• Suffer reputational damage
  
  
• Lose public trust
  
  
• Face heavy fines and legal consequences
  
  

CDD and EDD are not just legal requirements—they are essential pillars of responsible banking and financial security.

Tips for Effective Implementation of Due Diligence

1. Automate Where Possible
   Use AML software and AI tools to flag suspicious activity early on.
   
   
2. Train Your Staff
   Ensure employees are well-versed in KYC, CDD, and EDD procedures.
   
   
3. Stay Updated
   Regularly revise internal policies to comply with changing regulations and global risks.
   
   
4. Adopt a Risk-Based Approach
   Not all customers pose the same risk. Allocate resources accordingly to high-risk cases.

Conclusion

In a world where financial crime is increasingly sophisticated, banks must stay one step ahead. Applying customer due diligence is not just about ticking compliance boxes—it’s about safeguarding the institution and its stakeholders from risk. Knowing when to apply CDD and when enhanced due diligence is usually required can make all the difference.

Whether it’s onboarding a new client, processing a suspicious transaction, or managing ongoing relationships, diligence, transparency, and vigilance are the cornerstones of responsible banking.

If you’re a banking professional, compliance officer, or simply someone interested in how the financial world protects itself, understanding and applying CDD and EDD practices correctly is more relevant today than ever before.