Customer due diligence in the financial world is equal parts Jack Bauer and organized crime. Federal regulations require banks and most other financial institutions to collect the personal information of every new customer to ensure the customer is not posing as another person for the purpose of committing identity theft, money laundering, fraud or even attempting to fund a terrorist organization.
Federal Bank Regulations
Customer due diligence is born in part out of federal regulations stemming from the Bank Secrecy Act of 1970 and the United States Patriot Act. The Bank Secrecy Act requires U.S. financial institutions to keep detailed records of all cash transactions exceeding $10,000 for the purchase of negotiable instruments, including property such as an automobile. The United States Patriot Act requires almost every financial institution in the country to create and implement a customer identification system for the purpose of detecting illegal activity, including money laundering and terrorist group financing.
Know Your Customer
Know Your Customer or KYC is the process by which banks and other financial institutions verify the identity and source of finances for any prospective customer. KYC encompasses the procedures used in customer identification systems. Identity verification methods can include the copying of a state issued driver's license or U.S. passport along with proof of a valid Social Security number. Financial institutions are required to keep copies of identity verification materials as long as a business relationship with a given client exists. Banks and other financial institutions may investigate the source of any funds deposited by tracing the source of funds back to the original account.
Continuing Due Diligence
Banks and other financial institutions have the right under the law to continue due diligence practices to ensure a customer's financial behavior does not change dramatically over time. If a bank notices inordinately high sums of money deposited into an account, it may raise a red flag in the system causing an investigation into the source of funds. These practices are in place to ensure that if a terrorist cell is activated through funding of foreign money, it can be caught before the cell has the opportunity to use the funds.
Failure to Perform Due Diligence
A bank and its employees can incur significant federal penalties and corporate level fines for failing to utilize required customer verification protocols and conduct continuing due diligence of existing financial accounts. Specific employees who fail to perform the required identity verification steps could be implicated in any money laundering or terrorist funding practices which are uncovered after the fact. These crimes carry federal prison sentences up to a maximum of life in prison.