Customer Due Diligence is an evolving method of analyzing the risks posed by customers. Anti-Money Laundering (AML) and Know Your Customer legislation stand at the bosom of modern due diligence actions. When it did in the right approach, CDD grants businesses to sort out the high-risk individuals preemptively, adapting the business relationship, and cutting it short if required. Not only does this assist protect the business from AML sanctions, but it also contributes to the all in all integrity of the worldwide monetary process. As the customer due diligence is changing its fundamentals from the emergence. So why it is a monumental task for the businesses to stay compliant. While CDD is no longer the straightforward matter first sketched out in the Securities Act of 1933 but has become a multi-faceted compliance maze, which is progressively difficult to traverse.
Understanding the importance of risk
Before we analyze different phases of customer due diligence, it is essential to know the importance of risk measurement. Completing an internal AML risk-assessment of your business is the primary step in your customer due to the diligence journey. You must explore how high the risk of money laundering and criminal financing is on your platform. Moreover, it is super important to maintain a time-stamped documentation of risk-assessments. It confirms that regulators and auditors can understand your judgment-making method and provides some defense against a future sanction— should one of your customers be involved in the illegitimate activity.
Different Types of CDD
Customer Due Diligence or CDD, is the method where related data regarding the customer is collected and assessed for any probable risk for the company or money laundering/terrorist financing activities. CDD is requisite for KYC, and although these processes differ around the world, Customer Due Diligence generally supposes identifying your customer and knowing their actions. Later, a customer’s risk outline is assessed to be followed by essential Customer Due Diligence, Enhanced Due Diligence, or Simplified Due Diligence.
CDD starts by obtaining data about the buyer. The following levels should be included:
Residential address mailing
Contact numbers, email addresses
Birthplace, date of birth
Government-approved identification number
Government-issued tax identification number
What does CDD involve?
The CDD process involves performing a risk assessment and making the risk profile of the potential buyer. This risk-based initiative helps firms avoid participating in financial crime. For instance, it assists in terminating money laundering, which supports human trafficking and radical financing. It also stops firms from doing business with politically revealed individuals.
According to FinCEN, the CDD Rule includes the following steps:
Identify and cross-check the identity of customers
Define and verify the status of the beneficial owners of businesses opening accounts.
Determine the type and purpose of customer relationships to expand customer risk profiles.
Conduct ongoing monitoring to identify and report questionable transactions and, on a risk basis, to sustain and update customer info.
What about KYC?
Customer Due Diligence and Know Your Customer (KYC) are tightly interconnected theories. To be precise, KYC does play an essential role in the case of making CDD operations fruitful. Know Your Customer (KYC) methods are a critical function to assess customer risk, and a licit needs to comply with Anti-Money Laundering (AML) laws. Valid KYC call for knowing a customer’s identity, financial activities, and the threat they pose.
What Is Customer Due Diligence (CDD)?
Executing customer due diligence (CDD) is one of the most fundamental aspects of any AML/CFT regime. In order to recognize and convey money laundering and terrorism financing hazards, companies must be able to build that their clients are who they say they are and have been crystal clear about the nature of their business. Customer due diligence sometimes alludes to as Know Your Customer (KYC), is a method of background inspection run in accordance with legislation and in relation to the level of threat presented by the buyer.
Basics of Customer Due Diligence
Customer due diligence, at its most elementary level, includes verifying a customer’s identity and the business in which they are engaged, to an adequate level of confidence. The process comprises a number of regulatory functions: Customer Verification: Companies need to spot their customers by obtaining private information, including name, photographic ID, address, and birth certification, from a trustworthy, independent origin.
Advantageous Proprietary: Due diligence actions should point out beneficial ownership of a company in circumstances where this is not the client. Pinpointing beneficial ownership should include understanding the control formation of the company.
Business Relationship: Following customer and beneficial ownership identification, companies have to obtain data on the nature of the business relationship they are driven into and its purpose.
Why a Company Should Know Their Customer
Customer Due Diligence (CDD) information consists of the realities regarding a customer that should allow an organization to assess the extent to which the customer reveals it to a range of risks. These risks include money laundering and criminal financing. Organizations need to ‘know their customers’ for a number of reasons:
In fact, where there’s a matter of money, there are also criminals lurking to take benefit wherever they can. By restricting the financial activities, AML laws hit them where it hurts. And, there’s a lot of money to go after; the US Treasury reckons that over 300 billion dollars in unlawful activity happen in the US yearly.
to obey the requirements of related regulation and legislation.
to assist the firm, at the time the due diligence is carried out, to be reasonably definite that the buyers are who they say they are, and that it is apt.
to supply them with the products requested
to protect against cheat, including impersonation and figure out the fraud to favor the agency to define, during the course of a continuing relationship, what is unusual and to permit the unusual to be inspected;
if unusual events do not have a commercial or otherwise straightforward rationale they may involve money laundering, fraud, or handling criminal or terrorist property
to enable the organization to assist law enforcement, by providing available
Data on customers being searched following the making of a doubt report to the FIU.
What is simplified due diligence?
In particular, low-risk individuals and business owners can typically be evaluated using simplified due diligence. This is only eligible when there is a particularly minimal likelihood of the relationship being exploited to launder money or commerce terrorism.
Using the risk framework provided above as a basis, you can establish rules which allow you to estimate customers in a meticulous and tidy manner.
Very less cumulative transaction volumes within the calendar year
Resident in a country with a strong regulatory framework to fight money laundering and terrorism financing (typically member countries of the FATF)
Readiness to provide Know Your Customer data during the signup process
Give solid identification documents
Able to effortlessly prove the root of funds
Clearly pick out as the Ultimate Beneficial Owner
When do firms perform CDD?
Customer due diligence is needed when the customer and firm first inaugurate a business relationship. Firms also execute ongoing tracking of their existing customers.
Moreover, if a buyer moves into an upper-risk category, the firm accomplishes enhanced due diligence (EDD). This method involves a more in-depth analysis to dictate whether the customer’s risk has changed.
Firms typically analyze the customer relationship in response to the following standards:
Meaningful and unexplained variation in account activity
Changes in employment or business actions.
Changes in proprietary of a business entity.
Red flags identified by suspicious activity monitoring.
Receipt of law enforcement inquiries and requests.
The consequence of harmful media inquiry programs.
The span of time since the firm gathered customer data and assessed the customer risk profile.
What is standard due diligence?
Standard due diligence demand to define your customer as well as validate their identity. Likewise, there is a necessity to collect facts to enable you to understand the nature of the business association. This due diligence should give you the conviction that you know who your consumer is and that your product or service is not used as a tool to launder money or any other illegal activity. The largest part of your customers will typically require a standard due diligence procedure. This is fruitful when there is a very low chance of money laundering or terrorism financing happening as a consequence of the business relationship. As with expedited due diligence, there is a need to track your client and the relationship; this will spotlight any useful trigger events that may result in further due diligence is needed. Permission screenings should be applied to confirm that the customer is not recorded on watchlists issued by bodies like the European Union or Interpol.
What is Enhanced Due Diligence?
Enhanced due diligence (EDD) is a KYC action that bears a higher level of inspection of potential business collaboration. It highlights the risk that cannot be discovered by customer due diligence. EDD goes further away than CDD and looks to form an elevated level of identity assurance by attaining the customer’s address and identity and analyzing the risk factor of the customer. Enhanced due diligence is designed for dealing with high-risk or high-net-worth customers and large transactions. Because these customers and business deals pose more significant risks to the commercial sector, they are excessively regulated and keep an eye on to ensure that everything is on the high. There are several properties that separate EDD from regular KYC policies:
Meticulous and Actionable: EDD’s mainstay must be “meticulous and actionable,” it needs more proof and in-depth information.
Elaborate Documentation: The complete EDD method must record in detail, and regulators should be able to have instant entry to enhanced due diligence reports. This calls for more inquiry when it comes to how info is to gather and validate the reliability of those information sources. Logical Assurance: EDD requirements call for “reasonable assurance” when assuming a KYC risk rating. It means that the professionals responsible for making a “go” or “no go” decision must have accomplished all the necessary investigation steps and practice professional skills and looking after to get to their judgment.
Unique observation for PEPs: Special attention must pay to politically exposed persons (PEPs) — they’re treated as being an extreme risk because they are in conditions that can potentially be abused for money laundering.
How can you counter the criminal act?
Customer Due Diligence continues after setting up business relationships, as clients’ risk profiles may see a hike after some time. Financial institutions check clients’ transactions to make sure they are legal and that their risk-rating of the buyer stays the same. It is indispensable to confirm that the documents and other info collected in the CDD procedure update. Given the number of checks, it is nearly impossible to put them manually. Manual maintenance involves slow and more expensive customer dealing, which is not the most desirable thing for the business nowadays.
Automatically examine a customer’s past against various databases and sanction charts.
Make the onboarding methods straightforward.
The favor you respond quickly to any changes in regulatory laws.
Sum Substance out and toolkit for KYC/AML checks will assist you in protecting your business from commercial crimes. However, with the help of this modern software, a CDD check can be made even in only 30 seconds, an AML check can take at least 2 minutes.
For any kind of institution, one of the fundamental analysis made is to determine if you can trust a particular client. You need to make sure a potential customer is faithful; customer due diligence (CDD) is an essential aspect of effectively managing your risks and protecting yourself against lawbreakers. Besides being the proper thing to do morally, the customer due diligence (CDD) process is an intelligent business technique to eliminate heavy losses due to fraud, hefty fines, and sanctions, as well as bad promotion. Not knowing your customer in detail in today’s age is nonsense.