Customer due diligence for banks

Introduction

1. Supervisors around the world are increasingly recognising the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls. Without this due diligence, banks can become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost.

2. In reviewing the findings of an internal survey of cross-border banking in 1999, the Basel Committee identified deficiencies in a large number of countries' know-your-customer (KYC) policies for banks. Judged from a supervisory perspective, KYC policies in some countries have significant gaps and in others they are non-existent. Even among countries with well-developed financial markets, the extent of KYC robustness varies. Consequently, the Basel Committee asked the Working Group on Cross-border Banking¹ to examine the KYC procedures currently in place and to draw up recommended standards applicable to banks in all countries. The resulting paper was issued as a consultative document in January 2001. Following a review of the comments received, the Working Group has revised the paper and the Basel Committee is now distributing it worldwide in the expectation that the KYC framework presented here will become the benchmark for supervisors to establish national practices and for banks to design their own programmes. It is important to acknowledge that supervisory practices of some jurisdictions already meet or exceed the objective of this paper and, as a result, they may not need to implement any changes.

3. KYC is most closely associated with the fight against money-laundering, which is essentially the province of the Financial Action Task Force (FATF).² It is not the Committee's intention to duplicate the efforts of the FATF. Instead, the Committee's interest is from a wider prudential perspective. Sound KYC policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems. The Basel Committee and the Offshore Group of Banking Supervisors (OGBS) continue to support strongly the adoption and implementation of the FATF recommendations, particularly those relating to banks, and intend the standards in this paper to be consistent with the FATF recommendations. The Committee and the OGBS will also consider the adoption of any higher standards introduced by the FATF as a result of its current review of the 40 Recommendations. Consequently, the Working Group has been and will remain in close contact with the FATF as it develops its thoughts.

4. The Basel Committee's approach to KYC is from a wider prudential, not just anti-money laundering, perspective. Sound KYC procedures must be seen as a critical element in the effective management of banking risks. KYC safeguards go beyond simple account opening and record-keeping and require banks to formulate a customer acceptance policy and a tiered customer identification programme that involves more extensive due diligence for higher risk accounts, and includes proactive account monitoring for suspicious activities.

5. The Basel Committee's interest in sound KYC standards originates from its concerns for market integrity and has been heightened by the direct and indirect losses incurred by banks due to their lack of diligence in applying appropriate procedures. These losses could probably have been avoided and damage to the banks' reputation significantly diminished had the banks maintained effective KYC programmes.

6. This paper reinforces the principles established in earlier Committee papers by providing more precise guidance on the essential elements of KYC standards and their implementation. In developing this guidance, the Working Group has drawn on practices in member countries and taken into account evolving supervisory developments. The essential elements presented in this paper are guidance as to minimum standards for worldwide implementation for all banks. These standards may need to be supplemented and/or strengthened, by additional measures tailored to the risks of particular institutions and risks in the banking system of individual countries. For example, enhanced diligence is required in the case of higher-risk accounts or for banks that specifically aim to attract high net-worth customers. In a number of specific sections in this paper, there are recommendations for higher standards of due diligence for higher risk areas within a bank, where applicable.

7. The need for rigorous customer due diligence standards is not restricted to banks. The Basel Committee believes similar guidance needs to be developed for all non-bank financial institutions and professional intermediaries of financial services such as lawyers and accountants.

Footnotes:

1: This is a joint group consisting of members of the Basel Committee and of the Offshore Group of Banking Supervisors.

2: The FATF is an inter-governmental body which develops and promotes policies, both nationally and internationally, to combat money laundering. It has 29 member countries and two regional organisations. It works in close cooperation with other international bodies involved in this area such as the United Nations Office for Drug Control and Crime Prevention, the Council of Europe, the Asia-Pacific Group on Money Laundering and the Caribbean Financial Action Task Force. The FATF defines money laundering as the processing of criminal proceeds in order to disguise their illegal origin.

---

Full document:

• Original text in English (PDF, 25 pages, 116 kb)
• Translation in French (PDF, 22 pages, 125 kb)
• Translation in German (PDF, 24 pages, 138 kb)
• Translation in Italian (PDF, 24 pages, 130 kb)
• Translation in Spanish (PDF, 28 pages, 116 kb)

Attachment:

• General Guide to Account Opening and Customer Identification