Customer Due Diligence: Combatting Terrorist Financing

Customer Due Diligence

With adequate Customer Due Diligence (CDD) on new and existing customers, banks and private corporations’ compliance officers can combat and steer their organisations away from facilitating fraudulent activities. Importantly this includes, combating terrorist financing through greater identification tools and compliance with Know Your Customer (KYC) policies. CDD is a prerequisite to mitigating risk.

Strategic elements were set out in the Basel Committee on ‘Banking Supervision’s Customer Due Diligence for banks’ report at the International Conference of Banking Supervisors (ICBS) announcing a commitment to battle the laundering of funds and the funding of terrorist activities. In order to preserve the confidence and integrity of banking systems, applicable due diligence standards will need to be enacted.

The Consequences of Non-compliance
The inadequacy of KYC standards may lead banks to impending customer and counterparty risks. The fundamental risks include: legal, operational, reputational and concentration risk.

  • Legal risks: This focuses on the potential disruption of the operations of a bank. Through the means of lawsuits, unenforceable contracts or controversial judgements, the conditions of a bank are at risk. In the case of failing to adhere to mandatory KYC standards banks may be subjected to lawsuits and, perhaps, be penalised in the forms of fines, imposed by supervisors.
  • Operational risks: Subsequent risks stem from the inability to practice efficient CDD and ineffective control procedures. The business of a bank could suffer adverse effects if it is unable to manage its operational risks, for example, a weakness in the implementation of banks’ programmes.
  • Reputational Risks: The reputation of a bank is of the utmost importance for its depositors, creditors and the general marketplace. A bank’s reputation may be at risk if deemed, true or not, to be in the involved in terrorist financing, and or, other criminal activities. This leads to a loss of confidence in the integrity of the whole institution. Banks are frequently a vehicle for illegal activities, thus, they are significantly susceptible to reputational risks. Following KYC protocols and an effective CDD may mitigate these risks.
  • Concentration Risks: In need of robust information systems in order to identify credit concentrations and the restriction of the banks’ exposure to single borrowers/groups of related borrowers. With a strong customer due diligence measurement, to know precisely who your customers are, banks could measure their concentration risks.

In acknowledgment of such risks, 120 countries, organised by the ICBS, announced their commitment to cut the source of terrorist funding and the laundering of funds through tactics such as strengthening the enforcement of measures in order to make it harder to disguise the true ownership of bank accounts.

Stamping Out Criminal Activities
The conference, held in South Africa from September 18-19, implemented and endorsed the following procedures:

  • “Adoption of know-your-customer procedures within individual jurisdictions, as part of effective customer due diligence programmes; and
  • Sharing of information related to terrorist financing and money laundering with other supervisors and law enforcement agencies. “(BIS, 2002)

Through such measures, banks can co-coordinate, using transparency techniques and advanced compliance with KYC. Furthermore, the ICBS recognised an agreed standard for CDD, on-going transactions monitoring, a robust risk management programme for banks and thorough customer acceptance and identification practices.

Customer due diligence is at the forefront of techniques to combat terrorist and all criminal activities. Through on-going employee training and full compliance with procedures, banking supervisors are essentially ‘working together to get the job done’. The transparency of information is a crucial factor, with promises to face no impediments in accessing information – including on-site examinations.

Investigative Due diligence is at the core of Cedar Rose’s ethos and it recognises the importance of thorough and in-depth investigation in order to fully comply with KYC and safeguard assets. Cedar Rose can mitigate the banking sector’s risk via offering detailed and extensive due diligence reports. Cedar Rose is recognised globally as the experts in MENA due diligence and business intelligence. With a network of resources and local contacts and access to the largest database of companies, directors and shareholders for the region, Cedar Rose’s Analysts provide trusted and reliable reports through the conducting of meticulous research into individuals and companies. Its vast linked and multilingual database and excellent investigative teams can provide the information you need to conduct safe, secure and, importantly, thorough research into your customers. Comply with Cedar Rose and mitigate risks.

Keep up with current affairs and check out the exciting article on PSD2.

Written By Jack Evangelides, Marketing Intern

Bibliography

BIS, 2002. Customer due diligence: a new level of commitment among bank supervisors. [Online] Available at: https://www.bis.org/press/p020919a.htm
[Accessed 21 September 2018].

Sourced Image: Pixabay

*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***

Customer Due Diligence: Deceitful Business as Borrowers Misuse Business Loan

Customer Due Diligence - India

The failure to participate in investigative due diligence may directly impact your business for the worse. For a national bank in India this was the case, not only losing millions of rupees, but discrediting the public sector bank entirely. Know Your Customer (KYC) should be of the utmost importance for businesses and, especially, for the banking sector. The bank was deceived, hacked and, consequently, embarrassed when a film crew funded their production through fraudulent activities. So how important is Customer Due Diligence (CDD)?

 The Blueprints
According to recent reports, a small TV production company in Chennai, India, managed to acquire funds totalling to Rs 3.29 crore. Through the use of fraudulent methods via an Auto Loan Counsellor who supported WSP, the company, in its deceitfulness. For those who are not familiar with ‘crore’ it is, essentially, 1 crore = 100 lakh and 1 lakh = 100,000 Rupees (Rs 100,000). Thus, 3.29 crore is the equivalent of Rs 32,900,000, which, when converted to euros is around €391,280. But how did this small time production company swindle their way to riches?
According to the bank, 13 relatives had independently submitted applications for loans to buy new cars. Yet, through fraudulent methods, the Auto Loan Counsellor was able to process and sanction loans without the knowledge of the banking officials.  Moreover, the funds were all re-routed to the bank account of one person, an actor and producer. Not one dime of the illegally acquired intake was spent on buying luxury cars, but instead, it allegedly went towards the financing of producing a film. Customer - SBI

The Aftermath
Eventually, through routine checks, abnormalities were found in the loans. The bank took legal action and filed a civil suit. Conclusively, a declaration was sought from the High Court, understanding that the bank was entitled to have a ‘first charge’ from the sale proceeds of the movie. The investigations were not only time-consuming, but costly too. Through not having a robust, multilevel external compliance and due diligence procedure in place, the bank was duped out of almost 33 million rupees. Therefore, it is pivotal for the banking sector to enact professional and thorough inquiries into their customers in order to weed out fraudulent undertakings, which often seed from within.

Take Initiative
Cedar Rose offers impeccable investigative due diligence reports that can help your next business arrangement run smoothly. Through meticulous research, we provide a professional service that allows you to accurately know your customer. It is not worth taking shortcuts to save some money, when, in the face of ‘bad business’ the consequences are certain to be more costly. Not only financially, but potentially irreversible damage to your reputation is a real risk when you do not take the correct precautions. At Cedar Rose, the reports available are not only extensively detailed and carefully compiled, but easy to read and come in a variety of specifications.

For more information on Customer Due Diligence, keep up-to-date with the Cedar Rose Newsroom

Written By Jack Evangelides, Marketing Intern

Sourced Image: Pixabay
Sourced Image:
Pixabay

*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***