Conducting Enhanced Due Diligence on High-Risk Clients: A Guide for Banks
In an effort to prevent financial crimes, banks must conduct thorough customer due diligence on clients who pose a higher risk of committing fraud or other illegal activities. This includes individuals and entities that have been identified as being on sanctions lists, having suspicious transaction patterns, or having a history of non-compliance.
Regulatory Requirements
According to regulatory requirements, banks are required to perform enhanced due diligence on high-risk customers, which involves digging deeper into their financial activity and relationships with other entities to identify any potential red flags. This may require visiting the individual or company in person to verify their credentials and existence.
Sanctions Screening
Banks must also conduct thorough sanctions screening to ensure they are not dealing with entities that have been penalized by regulators for engaging in illegal activities. This includes checking for individuals, groups, or jurisdictions on lists of sanctioned entities.
Monitoring Transactions and Filing SARs
To further mitigate risk, banks must monitor transactions and customer activity closely for any suspicious patterns or anomalies. If a bank suspects a transaction or pattern of activity is out of the ordinary, it must file a Suspicious Activity Report (SAR) with the relevant authorities, such as FinCEN in the US.
Establishing Internal Controls and Audits
To prevent internal lapses and ensure compliance with regulatory requirements, banks must establish robust internal controls and conduct regular audits. This includes:
- Setting rules and restrictions for employees
- Conducting internal audits to evaluate the effectiveness of internal controls
- Having external auditors provide an objective assessment of the bank’s compliance program
Outsourcing and Vendor Management
Banks that choose to outsource or partner with third-party vendors must ensure these vendors meet regulatory requirements and have adequate risk management procedures in place. This includes:
- Verifying the vendor’s location, operating credentials, and beneficial owners
- Conducting ongoing monitoring of their activities
Training and Awareness
Regulatory compliance is critical to a bank’s success, and training employees on the importance of compliance is essential. Banks must develop training materials that outline regulatory standards and provide practical guidance on meeting them in everyday operations.
Community Reinvestment
Banks must also comply with community reinvestment requirements, which mandate that they provide services to all neighborhoods, including low-income and moderate-income areas.
Simplifying Compliance with Regtech Solutions
To simplify the compliance process, banks can leverage Regtech solutions like Unit21’s Transaction Monitoring and Case Management products. These tools can automate and manage various aspects of compliance, saving time and resources in the long run.
Get Started Today
For more information on how Unit21 can help your bank complete its compliance checklist, book a demo today.