There is nothing evil about knowing your customers, given that starting a new commercial connection is risky for organizations given the prevalence of scams, forgery, financial fraud, and terrorism nowadays. Naturally, banks find it challenging to verify that you are who you claim to be before they give you the money. Financial firms must confirm the identity of their clients and ensure they are being honest about their commercial interests in order to comprehend the risk exposures that they face (CDD). This procedure is more frequently referred to in corporate circles as customer due diligence.
The Financial Action Task Force (FATF) recommends CDD as a component of a risk-based strategy for anti-money laundering, and financial regulators in jurisdictions all over the world mandate it as the cornerstone of any Know Your Customer (KYC) process. Companies must comprehend the value of customer due diligence under the legal mechanism and how to implement it as a component of their risk management strategy in order to achieve regulatory compliance.
What is “Customer Due Diligence” (CDD)?
Customer due diligence is the technique of locating clients and confirming that they are unveiling their true identities. This is to make sure that they are genuine and will be utilizing the company’s services legally. Financial institutions and banks must carry out CDD in a financial environment in order to support their risk-based regulatory solutions and use the data they obtain to make crucial compliance choices.
As a result, CDD mandates that businesses gather, review, and analyze a wide range of data and documents, as well as sufficiently confidently validate that data. Many crucial compliance procedures, like blacklisting and adverse media checks, depend on the accuracy of client identities being confirmed during the due diligence process.
Why is CDD Important?
CDD is a critical tool in the fight against money laundering and terrorism financing. To get around AML/CFT rules, criminals who want to convert illegal money must find a way to bring those resources into the lawful financial system while hiding their identities. CDD provides businesses with a mechanism to identify those clients and apply the appropriate compliance controls against them in order to prevent financial crimes.
In complicated or greater-risk consumer banking environments, such as the online platforms offered by challenger banks, CDD is particularly crucial. In these circumstances, money launderers use the pace and secrecy offered by online financial institutions to better hide their identities by providing incorrect or fictitious information about themselves or even by accessing websites through proxies.
What does CDD involve?
Key factors for efficient CDD include the following:
Address, name, birth date, company registration number, and all other records that are pertinent to individual risk profiles should all be included in the information that businesses gather in order to verify a customer’s identity. That information needs to come from official documents like passports and licenses, and it needs to be confirmed by the organization that is accumulating it.
Beneficial ownership information
In some circumstances, it could be challenging to implement CDD since a transaction includes a business rather than a single client. Organizations must seek to establish ultimate beneficial ownership (UBO) in these circumstances to make sure that fraudsters are not leveraging business infrastructure or shell firms to get around compliance requirements.
Levels of Customer Due Diligence
There are various different degrees of customer due diligence, however, there are two main ones that vary based on the nature and conditions of a commercial transaction.
Simplified Due Diligence
The least amount of due diligence that can be done on a client that doesn’t always present a significant risk to the business is this. Clients are less likely to be involved in money laundering or terrorist financing.
Enhanced Due Diligence
When a client is seen to pose a greater threat to the company, enhanced due diligence, or EDD, is necessary. When there is a higher chance that the service or item you are offering may be used to finance terrorism or money laundering, such a circumstance is also considered high-risk. Clients who are politically exposed, those who may be involved in terrorist operations, those who register accounts online, and those who reside in high-risk areas are some instances of customers who pose a greater risk.
What is risk-based CDD? And what is EDD?
The Financial Action Task Force (FATF) has advised that a company’s CDD procedure should be a component of a risk-based compliance framework. As part of risk-based compliance, businesses must evaluate each client separately to determine their level of risk before deploying a compliance strategy appropriate for that risk. Additionally, risk-based adherence enables enterprises to strike a balance between their financial requirements and regulatory requirements by guaranteeing that AML resources are dedicated to worthy goals. In light of this, clients with higher risks might be subject to stricter compliance regulations, and consumers with lower risks might be subjected to more lax regulations.
Customers that pose a high risk must be subject to enhanced due diligence (EDD) checks that go above and beyond what is required under conventional CDD. EDD may request more identifying information from a customer or some type of verification, including copies of their private bank statements.
When starting a business connection, companies must conduct extensive due diligence to make sure the client meets the risk profile and isn’t hiding their identity. In the case of irregular transactions, even when some transactions are irregular, CDD measures must still be put in place. These may include transactions involving amounts greater than a specified limit or where the entities are situated in high-risk foreign countries. When there is a suspicion of laundering money, businesses should implement CDD checks if the customer is thought to be funding terrorism or financial fraud. When the supporting documentation is questionable. Whenever the identification papers that the client has provided are suspect or insufficient, businesses should conduct additional CDD examinations.
Companies should try to incorporate acceptable compliance technologies to help with the process because CDD can be a considerable regulatory challenge. In addition to assisting businesses with their CDD data collection and analysis responsibilities, software automation’s accuracy and speed improve the client onboarding experience and lower the possibility of expensive regulatory errors.
Smart technology enables companies to improve their compliance decisions when consumers deviate from anticipated cash behaviours or trigger AML/CFT alerts by using the data gathered during the CDD procedure to construct richer and more detailed client risk profiles. Similarly to this, smart technology can assist businesses in quickly adapting to changes in AML/CFT regulations or emerging criminal techniques, including creative ways to get around identity verification.