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Corporate Banking Customer-Due-Diligence Rules

Corporate Banking – Customer Due Diligence (CDD) Rules

1. Meaning of Customer Due Diligence

CDD is the process by which a bank:

Identifies its customers

Verifies their identity

Assesses the risk they pose (financial, legal, reputational)

Objective: Prevent money laundering, terrorist financing, fraud, and regulatory violations.

2. Legal & Regulatory Framework

3. Key Components of CDD

(A) Identification

Verify customer identity via official documents (PAN, Aadhaar, passport)

For corporates: incorporation certificate, MOA/AOA, board resolution

(B) Beneficial Ownership

Identify ultimate beneficial owners (UBO)

Directors and partners must be verified

(C) Purpose of Account / Transaction

Understand the nature and purpose of the relationship

Identify unusual or high-risk transactions

(D) Risk Assessment

Low, medium, high-risk categorization

Enhanced Due Diligence (EDD) for high-risk or foreign clients

(E) Monitoring

Continuous monitoring of transactions

Detect suspicious activity and report to FIU-IND (Financial Intelligence Unit – India)

4. Obligations for Banks

Obtain KYC documents before account opening

Maintain up-to-date records

Verify corporate borrowers’ ownership & control structure

File Suspicious Transaction Reports (STRs) under PMLA

Conduct periodic due diligence updates

5. Customer Due Diligence Process (Corporate Borrowers)

6. Consequences of Non-Compliance

Penalties under PMLA (fine / imprisonment)

RBI can issue directions, restrictions, or license suspension

Criminal prosecution in case of money laundering

Reputational damage for the bank

7. Landmark Case Laws

1. M/s PNB v. Nirav Modi (SC, 2018)

Failure in due diligence (LoUs issued without proper KYC) led to massive fraud; highlighted critical importance of CDD.

2. State Bank of India v. Union of India (SC, 2013)

Clarified regulatory powers of RBI to enforce KYC/CDD compliance.

3. ICICI Bank Ltd. v. Innovative Industries Ltd. (SC, 2017)

Court noted lapses in corporate borrower due diligence; emphasized responsibility for monitoring loan end-use.

4. UCO Bank v. Reserve Bank of India (Delhi High Court, 2015)

RBI’s directions on maintaining KYC and reporting suspicious transactions upheld.

5. Canara Bank v. Sahara India (SC, 2012)

Verified that banks must ensure customer identity is complete for corporate accounts; failure leads to liability.

6. Axis Bank v. M/s Rotomac Global (NCLT/NCLAT, 2021)

Banks’ CDD lapses contributed to undetected diversion of funds; emphasized importance of EDD for high-value corporate clients.

7. Punjab National Bank v. RBI (Delhi High Court, 2015)

Highlighted monitoring obligations for cross-border and high-risk clients.

8. Best Practices for Banks

Risk-Based Approach – Different CDD for low vs high-risk clients

Enhanced Due Diligence – For large corporate loans or politically exposed persons (PEPs)

Periodic Review – Update KYC records every 2–3 years or as per risk

Transaction Monitoring – Real-time alerts for suspicious activity

Reporting – Timely STRs to FIU-IND and regulatory compliance

Training – Staff must understand PMLA, RBI guidelines, and corporate fraud risks

Conclusion

Customer Due Diligence (CDD) in corporate banking:

✔ Prevents fraud, money laundering, and regulatory breaches
✔ Ensures transparency in corporate lending
✔ Protects banks from liability in case of borrower default or misappropriation
✔ Reinforced by RBI regulations, PMLA, and judicial interpretation

Effective CDD is not just compliance but a risk management tool for corporate banks.

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