William McDonough, chairman of the Basel committee on banking supervision, comments: "Systematic customer due diligence is an essential element of banks' risk management. It is critical to safeguarding confidence and the integrity of the banking system. The importance of a rigorous approach has been underscored by the recent terrorist attacks in the United States."

Supervisors around the world are increasingly recognising the importance of ensuring that their banks have adequate controls and procedures in place so that they know with whom they are dealing. This is necessary not only to comply with anti-money laundering legal requirements, but from a wider prudential perspective, says the BIS. Without adequate due diligence, banks can become subject to reputational, operational, legal and concentration risks, which can result in significant cost.

Colin Powell, co-chair of the working group on cross-border banking and chairman of the offshore group of banking supervisors, says: "Supervisors should ensure that banks apply an acceptable minimum standard of customer due diligence policies and procedures to all areas, embracing domestic and overseas operations, and corporate and private banking business. Banks should establish systematic procedures for identifying new customers, and for ongoing monitoring of accounts and transactions."

The extent of the monitoring needs to be risk-sensitive, he says. Financial institutions targeting high-net worth individuals will be under particular scrutiny.

For all accounts, banks should have systems in place to detect unusual or suspicious patterns of activity. Banks should ensure that they have adequate management information systems to provide managers and compliance officers with timely information needed to identify, analyse and effectively monitor higher risk customer accounts, says the BIS. The types of reports that may be needed include reports of missing account opening documentation, transactions made through a customer account that are unusual, and aggregations of a customer’s total relationship with the bank.