Enhanced due diligence for commercial customers begins... on foot
Up-front due diligence detects risks before committing
Best due-diligence tools walk into the prospect’s place of business
By Steve Cocheo, executive editor,
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She may not actually bring a pair of white gloves along, but when Elizabeth Snyder visits a new banking prospect, she brings common sense to the inspection.
Case in point: a new would-be customer that claims to be in the grocery business.
“If they say they’re a grocery store, I want to see groceries in the aisle, and not with dust on them,” says Snyder. Anything that looks out of place, or anything that looks too unused, or anything at all that doesn’t synch with the kind of business that the potential customer claims to be in is a signal to Snyder that the bank must stop and evaluate. The bank may decide to take a walk.
That’s why Snyder, senior vice-president and chief compliance officer at $676.8 million-assets Leaders Bank, believes site visits must play a part in the Oak Brook, Ill., bank’s enhanced due diligence efforts for Bank Secrecy Act/Anti-Money-Laundering compliance.
“Certain businesses require a site review even before we can consider taking them on as a customer,” explains Snyder.
Check first, then sign up
A key element to Leaders Bank’s enhanced due diligence process is the belief that no prospect should begin doing business with the bank until they’ve been vetted. Not all banks take this view, some determining that the due diligence can take place once the customer is on board. Snyder, speaking late last year at the Money Laundering Enforcement Conference sponsored by ABA and the American Bar Association, said that Leaders’ management believes otherwise.
“We decided that we had to determine risk at account opening,” said Snyder. “We felt that if you waited a couple of days, you’d start to run into problems. Now you’d have a loan that’s been booked, or an account relationship that’s been established, and then if your BSA officer recommends revisiting some of that, it begins to get complicated.”
Due diligence for customer review consists of two levels, according to the regulators. The basic level is customer due diligence, the series of policies, procedures, and processes that all customers face that begins with verification of customer identity and an assessment of the risks that appear to be associated with that customer.
For customers that pose increased risk, regulators call for enhanced due diligence to build a better understanding of the flow and type of business, and to implement appropriate suspicious activity monitoring.
Basics of the process
The business bank’s Financial Intelligence Unit, also headed by Snyder, oversees the diligence process. As part of the effort, Snyder or a lieutenant sit in on meetings with commercial staff to learn of new relationships coming up for review.
The relationship manager, working with the prospective customer, begins the drill by completing a questionnaire appropriate to the type of business. The relationship manager’s narrative description on the prospect governs classification. In addition, the bank also insists that all individuals who are “signers” for the firm be subjected to customer information program identification verification.
At this point, some types of prospects are classified as “hard stops,” and are referred right up to Snyder’s office. Certain business lines automatically result in a hard stop, including check cashing, money transfer, and internet gambling.
Once the questionnaire has been completed, the typical process hands off the vetting to the bank’s commercial and retail support staff. These employees collect all required documents necessary to back up points in the questionnaire. They also run checks through databases, for compliance with OFAC (Office of Foreign Asset Control) and other purposes.
Scoring and follow-up
The prospect’s NAICS code drives the risk rating, but this is added to scoring of responses to the questionnaire to arrive at the firm’s overall rating. Snyder explains that around 30% of prospects would score as high risks solely using NAICS (North American Industry Classification System), “which would be kind of shocking” if it panned out. However she said that after adjustment for other factors, about 4% wind up scoring as high risks. Some would be pushed up the scale based on behavior.
Overall, “I don’t like to be a nay-sayer,” says Snyder. “I’ll say instead, ‘We can go to that line of business, but I’ll outline for you what else we’ll need to know first’.”
The rating arrived at for the prospect drives the frequency with which monitoring is performed. High risks are reviewed monthly, while low-risk customers have no scheduled review beyond that for all customers.
As the bank comes to know and understand customers, some may move down the risk scale. On the other hand, the filing of a suspicious activity report on a customer previously rated low would cause their status to be reviewed. So, too, would a change in transaction patterns or exposure of some potentially suspicious activity. And some customers would be subject to annual site reviews, in addition to the initial ones discussed. •
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0410/index.php?startid=44
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