Customer Due Diligence (CDD) Flashcards

Which of the following is considered a core requirement of a Customer Due Diligence (CDD) program according to the FinCEN CDD Final Rule?

Answer: Conducting ongoing monitoring to identify and report suspicious transactions.

The FinCEN CDD Final Rule explicitly outlines four core requirements for CDD programs. These are: 1) identifying and verifying the identity of customers; 2) identifying and verifying the identity of beneficial owners of legal entity customers; 3) understanding the nature and purpose of customer relationships to develop a customer risk profile; and 4) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

A financial institution is onboarding a new corporate customer. According to the FATF Recommendations, identifying and verifying the identity of which of the following is a mandatory part of Customer Due Diligence?

Answer: The beneficial owner(s) of the corporation.

The Financial Action Task Force (FATF) Recommendations state that a key component of Customer Due Diligence (CDD) is identifying the beneficial owner and taking reasonable measures to verify their identity. This ensures that the financial institution knows who ultimately owns or controls the legal entity customer, which is crucial for assessing risk.

A bank determines that a new customer relationship presents a low risk of money laundering or terrorist financing. Under a risk-based approach, which level of due diligence would be most appropriate to apply at the start of the relationship?

Answer: Simplified Due Diligence (SDD)

Simplified Due Diligence (SDD) is a streamlined approach to CDD that is permitted when the risk of money laundering or terrorist financing is assessed as low. It allows for less intensive verification and monitoring measures but still requires the core components of CDD to be met. Standard CDD is for normal-risk customers, and Enhanced Due Diligence (EDD) is for high-risk customers.

An anti-money laundering analyst is reviewing a customer's account. Which of the following scenarios would most likely trigger the need for Enhanced Due Diligence (EDD)?

Answer: The customer makes a large, unusual transaction that is inconsistent with their established profile and has no apparent economic purpose.

Enhanced Due Diligence (EDD) is required for high-risk situations. An unusual or large transaction without an apparent economic purpose is a significant red flag that increases the customer's risk profile and would trigger the need for EDD to understand the source of funds and the purpose of the transaction. The other options describe normal, low-risk activities.

A key element of developing a customer risk profile as part of the CDD process involves:

Answer: Understanding the nature and purpose of the customer relationship.

A fundamental component of Customer Due Diligence is understanding the nature and purpose of the customer relationship. This allows the financial institution to develop a customer risk profile and anticipate the types of transactions the customer is likely to conduct. This baseline is essential for ongoing monitoring to detect activity that is unusual or inconsistent with the customer's profile.

What is the primary purpose of ongoing monitoring within a Customer Due Diligence (CDD) program?

Answer: To detect transactions that are inconsistent with the customer's known profile and report suspicious activity.

Ongoing monitoring is a critical pillar of CDD. Its primary purpose is to scrutinize transactions to ensure they are consistent with the institution's knowledge of the customer, their business, and their risk profile. This allows the institution to identify potentially suspicious activity that may be indicative of money laundering or other financial crimes and report it as required.