Customer Due Diligence (CDD) is an integral part of Anti-Money Laundering (AML) for the verification and authentication of customer identity.
According to the Bank Secretary Act, Customer Due Diligence comes under KYC compliance, where financial institutions and banks have to gather sufficient information from potential customers to ensure and verify that users are not involved in any financial crime before pursuing a business relationship.
What Is Customer Due Diligence?
Customer Due Diligence is a series of checks banks and financial companies undergo to accomplish customer verification tasks. After carrying out CDD, a risk score analysis of the user or potential customer is presented to the company to process further.
Under Customer Due Diligence regulations, businesses and banks have to get the following information from various sources:
- Basic information for identity, including name, address, and date of birth
- Information regarding customer’s transaction activities
- Verification with public data lists, including the list of companies
- Sanctions list issued by the government
In CDD, banks and financial companies verify customers’ identities, gather information regarding the business users are involved in, and analyze the utilization of accounts. The documents needed for verification are listed below:
- Driving License
- Utility Bills
- Incorporation Documents
- Business Licenses
These documents help businesses and banks to know who their customer is and understand their financial activities and potential risks or challenges associated with their financial activities.
Components of Customer Due Diligence
Know Your Customer policies or laws include Customer Due Diligence as a key element. Along with the customer onboarding processes of new customers, continuous monitoring also holds significant importance.
The procedure for customer due diligence includes the following stages:
- Identity information from customers is collected and verified while conducting customer onboarding processes.
- Following an effective customer identity verification, a client’s risk assessment profile is developed to examine the risk involved with the individual and their company.
- High-risk customers further require Enhanced Due Diligence (EDD) procedures that involve further verifications to authenticate the credibility and authenticity of customers.
- Continuous monitoring of clients and their financial activities is important to track and report suspicious fiscal activities.
Importance of Customer Due Diligence
In today’s fast-paced and swiftly revolutionizing world, CDD is significant in preventing financial crimes like financial terrorism, money laundering, and corruption. This is how compliance with CDD helps financial institutions and serves multiple purposes:
- Prevention of Financial Crimes
Customer Due Diligence is crucial in the detection and prevention of financial crimes. Moreover, it also assists financial companies in preventing their resources from being used for false and fraudulent activities.
- Compliance with Regulatory Approaches
Under the laws and recommendations issued by FATF, compliance with regulatory standards of Customer Due Diligence, such as AML regulations, is mandatory for banks.
- Detection of Unusual Patterns of Activities
Customer Due Diligence is of great importance since it helps in identifying and analyzing unusual activities of businesses during their relationship with other organizations. Sudden changes in user behavior and transaction activities can be detected via CDD procedures.
- Identification & Management of Customer Risks
A thorough Customer Due Diligence check assists companies in spotting potential risks associated with businesses and customers, including their funding sources, the purpose of funding, and beneficial ownership.
Identifying & Reporting Suspicious Customer Transactions
As Customer Due Diligence identifies any criminal activity, banks or financial companies must timely report the information to the Financial Intelligence Unit (FIU) through a suspicious activity report (SAR).
AML and CFT regulations help organizations protect the company, its employees, and its officers from criminal activities. Protection is applied in accordance with FATF standards, irrespective of any legislative or administrative provisions.
Expertise & Technology for Effective Customer Due Diligence Process
Effective KYC and CDD measures based on technology and expertise help to analyze the risk profiles of their customers and businesses as well as the risks associated with them. However, banks and financial companies must be innovative and flexible in how they tackle CDD, as with any other component of AML/CFT policy.
Firms may improve their Customer Due Diligence processes and meet regulatory standards with solid AML KYC solutions that check against the sole real-time risk repository that includes individuals and corporations worldwide. Companies should make sure they have automated systems in place that update entity profiles as soon as a change is made while continually monitoring a commercial connection. Although technology offers helpful tools to speed up CDD procedures, human awareness is still essential for identifying and countering emerging risks.
The Bottom Line
Customer Due Diligence is crucial for banks and financial institutions to verify and authenticate customer identities and prevent financial crimes. From collecting information to verifying customer information and continuously monitoring financial activities, it helps prevent fraudulent activities, identifies unusual patterns of behavior, manages customer risks, and facilitates the reporting of suspicious transactions. However, advanced technology and expertise also play a significant role in identifying and countering risks associated with customer onboarding.