What should a financial institution do if a customer refuses to provide requested identification documents?

When a customer refuses to provide requested identification documents, the appropriate action for a financial institution is to decline to open the account or terminate any business relationship with that customer. This is grounded in the requirements of the Bank Secrecy Act (BSA) and the USA PATRIOT Act, which mandate financial institutions to verify the identity of their customers as part of their Know Your Customer (KYC) obligations.

Maintaining a strong KYC policy is crucial for preventing money laundering and terrorist financing. If a customer is unwilling to comply with identity verification requirements, it indicates a potential risk that the institution cannot adequately assess. Declining to establish or continue a relationship in such cases is necessary to uphold compliance with regulatory obligations and protect the institution from potential legal and reputational risks.

Institutions must err on the side of caution in compliance matters; thus, accepting an application under special conditions or asserting that identification is optional could lead to vulnerabilities in their client verification processes. Similarly, requesting additional documentation later is not advisable because it does not address the critical need for timely and accurate identity verification right from the start of the banking relationship.