Up-Front Due Diligence Detects Risks before Committing: Best Due-Diligence Tools Walk into Prospect's Place of Business

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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. …