Behind the smiling faces of the relationship managers greeting, you generously, is a history of a systematic vetting carried out about you, ensuring compliance with KYC and AML standards. Well, there is nothing wicked behind this considering the fact that engaging in a new business relationship is risky for businesses when we live in a world of frauds, impersonation, money laundering and terrorism. It is naturally difficult for banks to ascertain your claim of being who you say you are before they hand you over the money, especially when they must verify customer identities as part of their compliance due diligence. In business terms, this process is more commonly known as ‘Customer Due Diligence’ (CDD) which is essential for financial services to mitigate risks associated with potential customers.
What is Customer Due Diligence (CDD)
Customer due diligence (CDD) is a process used by financial institutions and other regulated businesses to identify and assess the risks associated with a customer or client, particularly the threat of money laundering or financing terrorism. The goal of CDD in banking is to gather and verify sufficient information about a customer or client to determine their identity and assess their potential risks to the business. This can include verifying the customer's identity, reviewing their financial history and transactions, and analyzing their business activities and relationships as part of the CDD process, in compliance with AML regulations.
We, as individuals, also perform due diligence knowingly and unknowingly, often in the context of identifying and verifying information about the customer. From going out to a new restaurant, planning a holiday, and even searching for jobs, we seek maximum data to help us confirm the information, just as businesses do when they conduct CDD to verify customer identities. For businesses, a sophisticated process is developed to verify your identity called Customer Due Diligence. In short, due diligence is performing background checks on the customer to ensure they are properly risk assessed before being onboarded, in line with KYC and CDD requirements. Customer Due Diligence enables an organization to evaluate the extent to which the customer exposes it to various risks, including those related to PEPs , sanctions, and money laundering and terrorist financing.
Understanding Customer Due Diligence (CDD) in Risk-Based Approach
The risk-based approach to customer due diligence checks involves evaluating new customers based on their financial activity, risk level, and background verification. Organizations must apply CDD at various levels depending on the types of CDD required for different business relationships, including the identification and verification of beneficial owners.
When should a bank apply customer due diligence?
Due diligence, as we know, is an audit of a potential investment or product to confirm all facts, which might include the review of financial records. A key question that arises in financial sectors is, when should a bank apply customer due diligence? Most companies research before entering into an agreement or a financial transaction with another party for the following reasons: to mitigate risks associated with potential financial crime and ensure compliance due diligence with CDD requirement.
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Entering a new business deal:
Companies must perform thorough due diligence prior to establishing a business relationship in order to ensure the customer matches their risk profile and isn’t using a false identity. -
In the case of Infrequent dealings:
Certain transactions are not regular but still require implementing CDD measures. These might include dealings where an amount over a certain threshold is involved or when the entities are located in high-risk foreign nations, increasing the money laundering risk. -
When suspecting money laundering:
If a customer is suspected of money laundering or financing terrorism, companies must implement CDD checks. -
When the documentation is not reliable:
When the identification documents that the customer has furnished are either unreliable or inadequate, companies should apply further CDD investigation to mitigate customer risk and assess their risk profile.
Levels of Customer Due Diligence Process: SDD, StDD, and EDD
Depending on the type and circumstances of a business dealing, there are two broad levels of customer due diligence process among several others, viz: customer identification and enhanced due diligence for high-risk customers.
1. Simplified Due Diligence (SDD):
This is the lowest level of due diligence that can be completed on a customer who does not always pose a high risk to the organization. The customers have less probability of being involved in money laundering or terrorist financing due to effectively know your customer (KYC) practices, which are a crucial aspect of CDD and AML.
2. Enhanced Due Diligence (EDD)
Enhanced Due Diligence or EDD is required when a customer is perceived to be at a higher risk of money laundering to the company. A high-risk situation also occurs where there is an increased opportunity for money laundering or terrorist financing through the service or product you are providing. Examples of higher risk customers may include politically exposed people, customers with suspicion of terrorist activities, non-face to face account opening and customers located in high-risk locations.
3. Standard Due Diligence (StDD):
Standard Due Diligence (StDD) is the default level of CDD applied to most customers. It involves collecting and verifying basic identity information and assessing the customer's risk profile based on typical business activities. This level ensures a balanced approach to compliance, covering the majority of customer relationships.
Steps Involved in Due Diligence in Banking and Financial Institutions
Customer due diligence is an important aspect of a financial institution's risk management and compliance with anti-money laundering (AML) and Countering Financing of Terrorism (CFT) regulations.
The customer due diligence process typically involves the following steps to assess customer risk effectively:
Identify the customer:
This involves collecting information about the customer's identity, including their full name, date of birth, address, and identification documents, as part of the identity verification process. Accurate and complete data collection at this stage is paramount for subsequent verification and risk assessment.
Verify the customer's identity:
This involves verifying the information provided by the customer using reliable and independent sources. This may include checking identification documents, such as a passport or driver's license, against a database or cross-referencing the information with public records. Leveraging advanced verification technologies can significantly enhance the accuracy and speed of this process, reducing fraud risks.
Assess the customer's risk profile:
This involves evaluating the customer's risk for money laundering or financing terrorism based on various factors, such as financial history, business activities, and geographic location, as part of a risk-based approach to compliance. A dynamic risk assessment framework allows institutions to adapt to evolving threats and allocate resources efficiently.
Monitor the customer's transactions:
This involves ongoing monitoring of the customer's transactions to ensure that they are consistent with the customer's known financial profile and risk profile, a key aspect of continuous CDD and AML compliance. This may include reviewing the customer's account activity, monitoring transactions, and reporting any suspicious activity to the relevant authorities. Continuous monitoring is essential for detecting and preventing financial crime in real-time, ensuring ongoing regulatory adherence.
The customer due diligence process is an important tool for financial institutions to prevent financial crime and maintain compliance with regulatory requirements. It helps to ensure that financial institutions are not being used to facilitate money laundering or financing terrorism and helps to protect the financial system’s integrity.
Final Thoughts: Why Effective CDD Measures Matter for Your Business
A strong CDD process ensures businesses can identify risks, meet regulatory obligations, and protect against financial crimes. Whether implementing simplified due diligence for low-risk customers or conducting enhanced due diligence for high-risk transactions, the approach to CDD must be robust, adaptable, and continuously evolving.
In today's complex regulatory landscape, partnering with an expert in CDD and AML solutions is not just a compliance necessity—it's a strategic advantage. CRIF offers cutting-edge solutions that streamline your CDD processes, enhance accuracy, and ensure full regulatory adherence, allowing you to focus on your core business while we safeguard your operations.
If you are thinking of onboarding a new customer or want to acquire another small business or you simply want to add new suppliers to your business, CRIF can perform the right Customer Due Diligence (CDD) for you, ensuring all necessary identity verification steps are taken efficiently and effectively. [New: Contact CRIF today to discover how our comprehensive CDD solutions can protect your business, optimize your compliance efforts, and drive sustainable growth.!
