Implementing Customer Due Diligence

C

Customer due diligence (CDD) is a critical component of an effective anti-money laundering (AML) program. It involves the process of identifying and verifying the identity of customers, assessing the risks they pose, and monitoring their transactions to detect suspicious activity.

In the context of the given scenario, the compliance officer at the small community bank should implement customer due diligence (CDD) as an ongoing activity that may vary commensurate with the risk profile of the customer (option C). This approach is consistent with the risk-based approach (RBA) to AML/CFT, which is widely accepted and recommended by regulatory authorities.

The RBA requires financial institutions to identify, assess, and understand the money laundering and terrorist financing risks associated with their customers, products, services, and geographic locations, and to develop and implement risk-based policies, procedures, and controls to mitigate those risks effectively. This means that the level of CDD required for a customer should be commensurate with the level of risk the customer poses to the bank.

Therefore, conducting CDD only once at initial customer onboarding (option B) or conducting an annual compliance review and approval of customers (option A) may not be sufficient to address AML risks adequately. It is crucial to conduct ongoing monitoring of customer transactions to detect any suspicious activities or changes in customer behavior that may indicate potential money laundering or terrorist financing activities.

Finally, option D is not the best answer because it suggests that CDD should only be applied to customers who pose higher money laundering or terrorist financing risks. However, AML regulations require financial institutions to apply CDD to all customers, regardless of their risk profile. The level of CDD required may vary depending on the risk level of the customer, but all customers must undergo some level of CDD.