Why Due Diligence Benefits Both Financial Institutions and Customers

Without customer due diligence, Barbadians’ financial investments are more susceptible to fraud and they are more vulnerable to identity theft and reputational damage.

This was one of the takeaways at the recent Domestic Financial Institutions Conference (DFIC), which was jointly hosted by the Central Bank of Barbados and the Financial Services Commission.

In the second edition of the virtual series, regulators and representatives from the financial sector discussed the topic "Customer Due Diligence, Reporting Obligations & Monitoring.” The panel first explained that financial institutions need to comply with international Anti-Money-Laundering and Combatting the Financing of Terrorism (AML/CFT) requirements, which are often the rationale behind customers having to submit a checklist of documents that include ID, proof of address, and source of funds such as job letters.

Cyralene Benskin-Murray, General Counsel at the Financial Services Commission pointed to the findings of the national risk assessment that was done for Barbados, saying “one of the things we found we are very vulnerable to and one of the threats we face when it comes to crime, very high on the list, is fraud.”

She noted that financial institutions use the information they request from customers as part of the due, diligence process to fight money laundering (ML) and terrorist financing (TF), and for monitoring and reporting purposes, as well as to develop customer profiles that help them to establish a pattern for incoming and outgoing funds. Being able to detect unusual and potentially suspicious transactions can help them to protect customers from fraud, identity theft and the reputational risk that comes with being even unwittingly linked to a financial crime.

Imagine criminals intercepting your online activities and using the information they find to send instructions to your bank or credit union to transfer money out of your account to theirs. Benskin-Murray revealed that this has happened, and that the attempted theft was prevented because the financial institution flagged the transaction as unusual for the customer being targeted.

While she used that example to highlight the need for due diligence, she nonetheless asserted that financial institutions should not treat requests for information as rote:

“You are not required to produce information for just producing it sake. It is not about collecting information. The ultimate goal is to prevent money laundering and terrorist financing. The goal is to also make sure that predicate offenses, which are like fraud, corruption, and drugs, that the proceeds for those crimes do not find their way into our system.”

Benskin-Murray advocated for the use of more risk-based assessment principles such as Know Your Own Customer (KYOC). She acknowledges that “most institutions are conservative in their approach”, but discourages “one brush for everyone”, saying “there is latitude even within the guidelines from the regulators which gives you the opportunity to apply various degrees of due diligence based on the customer’s risk profile.”

She also believes that even with the obligations imposed by the Financial Action Task Force (FATF), local regulators, and the threat of enforcement action, it is important to prevent people being excluded from financial services.

“Don’t ignore the customer. No business can underestimate the power of customers... without a positive experience, some exit the system and we have problems with financial inclusion.”

Her recommendation to protect inclusion is “increasing the convenience to customers first, through financial education and communication.” Helping customers to understand, she says, helps financial institutions. Explaining the “why” increases “voluntary compliance”; understanding the reasons for the process leads customers to “bring the information in.” Achieving this, however, will require financial institutions to better train their staff:

“Persons at the frontline, if they are trained, know what discretion they can use… If we ask for only what we need based on the risk profile of the customer, that may seem less frustrating and demanding.”