Key Elements of Customer Due Diligence

ACE

According to the Basel Committee on Banking Supervision (BCBS) standards, the following three statements best describe sound practices in relation to customer due diligence (CDD) policies and procedures:

1. C. Banks should take into consideration the occasional banking transaction or the size/level of assets to build an understanding of the customer's profile and behavior. This statement highlights the importance of assessing the occasional banking transactions or the size and level of assets involved in a customer's activities. By considering these factors, banks can gain a better understanding of the customer's profile, behavior, and potential risk. This information helps banks determine the appropriate level of due diligence required and enables them to detect any suspicious activities that may indicate money laundering or terrorism financing.

2. D. Banks should develop and implement clear acceptance policies and procedures to identify the types of customer that are likely to pose a higher risk of financing terrorism or money laundering. This statement emphasizes the need for banks to establish clear acceptance policies and procedures to identify customers who may pose a higher risk of being involved in terrorism financing or money laundering. By developing these policies, banks can effectively identify and mitigate the risks associated with such customers. This includes conducting enhanced due diligence measures, implementing additional controls, and establishing appropriate monitoring systems.

3. E. Banks should implement enhanced due diligence measures for entering business relationships with high-risk customers, such as approval by senior management. This statement highlights the importance of implementing enhanced due diligence measures when establishing business relationships with customers who are deemed to be high-risk. Enhanced due diligence involves gathering additional information and verifying the customer's identity, source of funds, and purpose of the business relationship. By obtaining approval from senior management, banks ensure that a higher level of scrutiny is applied to these high-risk customers, reducing the risk of facilitating money laundering or terrorism financing.

Now, let's analyze the other answer choices to understand why they are not considered sound practices:

• A. Banks should identify its customers based on a general-rules based assessment without considering the expected size and use of the account. This statement is incorrect because it suggests that banks should identify customers solely based on a general-rules based assessment, without considering the expected size and use of the account. However, a risk-based approach is essential in CDD, and taking into account the expected size and use of the account is crucial for effective risk management.

• B. Banks should never allow for verification to be completed after the establishment of the business relationship since it would not be essential for the normal conduct of business. This statement is incorrect because it implies that verification should never be completed after the establishment of a business relationship. However, ongoing monitoring and verification are essential to detect any changes in the customer's risk profile or suspicious activities that may arise during the course of the relationship.

• F. Banks should use CDD procedures based on another bank's standards when subject to the same criteria for handling funds of a shared customer. This statement is incorrect because it suggests that banks should use another bank's CDD procedures when handling funds of a shared customer. However, each bank is responsible for implementing its own CDD policies and procedures based on its risk assessment and regulatory requirements. Relying solely on another bank's standards may not adequately address the specific risks associated with the customer.

In summary, the sound practices for customer due diligence (CDD) policies and procedures, according to the Basel Committee on Banking Supervision standards, include considering the occasional banking transactions or the size/level of assets, developing clear acceptance policies to identify higher-risk customers, and implementing enhanced due diligence measures for high-risk customers with approval from senior management.