Customers Due Diligence Definition

On this page we will provide the reader with a customer due diligence definition and give a practical example of customers due diligence for banks. Trying to get money coming from criminal activities to seem to be honestly acquired is called money laundering. Money laundering laws based on the EU’s Third Money Laundering Directive, which basically requires that operators in some markets to assess the risk of being used for money launder or terrorist financing.

By law these operators must get to know their customers better, for example to understand the purpose of the business relationship and their transactions, and perform a customer due diligence before they take on a new customer. That’s why they for instance need to clarify these questions with a potential customer:

• where their money comes from
• view their transactions and business
• if they are a business customer: the company’s operations, sales and ownership

Special rules also apply to politically exposed persons residing abroad (so-called “Politically Exposed person”). The operator needs to know for example if the customer has a political assignment or high position in any State or if the customer is a close family member of someone with such assignments. All customer information is confidential and shall remain confidential.

Companies and businesses can use due diligence services, provided by experienced operators in this field, to make sure that they are in compliance with law and KYC rules.

Initial Identity Check

A basic requirement for operators is to know who the customer is and that requires an initial identity check. This is why a potential customer need to send in a copy of valid identification documents (driver’s license, passport or other approved form of ID) to the operators covered by the money laundering laws. The copy must be certified by an independent person to affirm customer identification.

If the customer is a company they must provide a copy of registration certificate and a copy of valid identification documents for the person / authorized signatory who will make the transaction. The copy must be certified by an independent person.

Customers Due Diligence for Banks

The money laundering law was implemented on the 15th of March 2009 in Sweden. Among other operators’ banks are subject to the law that is supposed to prevent money laundering and terrorism financing. The law should have been implemented in all EU countries by now.

I practice the law requires the bank to make an assessment of risk to be used for money laundering. Therefore the bank must have good knowledge of the customer and the customers’ business when a relationship begins. Customers due diligence for banks also requires that the bank continually must monitor customer transactions.

The law means that the customer must identify themselves when they want to do any transaction, such as when the customer wants to open an account or wants to make a transfer. When it comes to deposits the bank can also be required to ask further questions to the customer regarding the source of funds.

Terrorism Financing

Concerned operators should not be used for terrorist financing and should be prohibited from doing business with persons or organizations on EU’s sanctions lists. Operators are required to make checks against official records of individuals and organizations who authorities believed to be linked to terrorist activities. Operators must also in all other ways try to prevent the financing of terrorism.

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