Are you acquainted with your customers? In any case, you ought to be. Failure to do so could result in fines, sanctions, and reputational damage for financial institutions (FIs) if they inadvertently facilitate money laundering or terrorist financing.
Know Your Customer (KYC) has become an important part of the due diligence process for financial institutions all over the world in today’s changing financial environment. The Customer Acceptance Policy (CAP), which serves as the foundation for developing a robust customer acceptance process, is one of the 4 pillars of KYC. In this guest post, we’ll look at the concept of a customer acceptance policy.
Customer Acceptance
Policy:
A Customer Acceptance Policy (CAP) is a set of standards and criteria developed by financial institutions to determine the types of customers they are willing to serve. It establishes the foundation for identifying and mitigating potential risks related to money laundering, terrorist financing, and other financial crimes. Companies can ensure that their customers operate responsibly while remaining in compliance with regulatory requirements by implementing a well-defined CAP.
Let’s say
A well-known financial institution, XYZ Bank, uses its customer acceptance policy to ensure compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) laws. To reduce the risk of supporting money laundering or terrorist financing, the bank has developed a strong and comprehensive policy.
1.Customer Due Diligence (CDD):
Before onboarding any new customer, XYZ Bank conducts a thorough CDD process and follows a standardized customer due diligence checklist to gather relevant information and assess the customer’s risk profile.. The following mandatory KYC information is provided to the bank:
- Full name on a legal identification document, such as a passport or national identity card.
- Address and contact information.
- Sources of funds and nature of business activities.
- Information about the company and its customers.
For high-risk customers, the bank receives additional information such as the purpose of the account, the expected volume of transactions, and the beneficial owner’s details
2.Identity Verification:
When determining a customer’s identity, the company may consider using online services or services provided by relevant issuing authorities or entities to verify identity documents. This consideration will influence the documentation requirements and other information required for different customer categories based on perceived risk, all while adhering to the PML Act, 2002 requirements.
3.Risk Assessment:
XYZ Bank has implemented a risk assessment system that classifies customers as low, medium, or high risk based on their characteristics, financial status, and business activity. This division assists the bank in implementing and adjusting its risk management system.
4.PEP Analysis:
As part of its customer acceptance policy, XYZ Bank conducts audits against various databases and checklists, including those provided by the RBI, SEBI, and other regulatory authorities. PEPs, people with known criminal records, and companies linked to terrorist groups are also investigated by the bank.
5.Continuous and periodic reviews:
After the account is opened, XYZ Bank monitors the customer’s transactions and activities regularly. Periodic surveys are conducted by the bank to improve customer information and risk profiles, particularly for high-risk customers. Before opening a new account, thorough screening will be performed to ensure that the customer’s identity does not match any individuals with known criminal backgrounds or banned entities, such as those listed by the RBI, SEBI, NHB, IRDA, United Nations Security Council (UNSC), and OFAC, as per section 51A of the Unlawful Activities (Prevention) Act, 1967.
6.Unsupported Data:
The company will not open an account if it is unable to perform the necessary Customer Due Diligence (CDD) measures, which include verifying the customer’s identity and obtaining the necessary documents based on the risk classification. This could occur if the customer is uncooperative or the data/information provided is untrustworthy. Every account closure decision is made at a high level by the bank, with appropriate communication to the customer explaining the reason for the action.
Bottom Line:
Finally, the Customer Acceptance Policy is an important part of the 4 pillars of the KYC process that ensures financial institutions are protected from potential risks. FIs can effectively assess client risk profiles and maintain compliance with various regulatory requirements by establishing clear guidelines and procedures. A strong CAP not only safeguards the institution against financial crime but also fosters trust among customers and regulators. Adopting a robust Customer Acceptance Policy is an essential step in maintaining the integrity and confidentiality of financial systems in today’s complex financial landscape.
