For the financial services industry, complying with rules can be a difficult endeavor, and doing so can be a drawn-out and tedious process. However, no matter how complicated the procedure is, the consequences of non-compliance might be costly. Therefore, the financial services industry needs to use a thorough Customer Due Diligence (CDD) checklist. Every company offering financial services must verify its clients during the onboarding process in accordance with international laws.
Depending on the customer and the mode of account, several steps in the customer due diligence process may be required. Companies should consequently use a risk-based approach to streamline the process. This enables them to confirm their customers based on the risks they pose to the business.
What is Customer Due Diligence?
Performing Customer Due Diligence (CDD) involves acquiring personal information for the purpose of verifying a customer’s identity and assessing their level of fraud risk. In order to comply with CDD, companies are require to collect the name, the address, details of their business, and how they plan to use their account. It is important for businesses to cross-reference clients’ information with official documents, including driver’s licenses, passports, utility bills, and incorporation paperwork, in order to make sure they are receiving the truth from clients.
Types of Client Due Diligence for Banks
Customer due diligence in the banking industry falls into three categories: Standard, simplified, and enhanced.
Standard Due Diligence
Using KYC procedures, banks must first verify and identify their customers as part of this type of KYC due diligence process. Customers are authenticating here using their personal identity data and government-issue official identification documents. An impartial third-party provider that is dependable and trustworthy handles this process. The banking industry’s standard due diligence deliberately gives those with moderate risk elements priority. When there are a lot of transactions going on or there are suspicions of criminal activity, this investigation is done to determine the true motivation behind a commercial collaboration.
Simplified Due Diligence
According to risk assessment methodologies, this type of due diligence in the banking sector includes little to no danger of financial crimes, such as the ability to identify customers who are residents of low-risk areas just by looking at their identity documents and personal information.
Enhanced Due Diligence
Similarly, when money laundering, corruption, tax dodging, and terror financing pose significant financial risks, banks conduct enhanced due diligence. In the case of high-risk customers, companies require further information for EDD background checks. A more detail due diligence process for banks will ensure that bigger funds, assets, and transactions are properly examine to reduce the probability of crimes and, as a result, regulatory fines. Customers are examine here against government-issued sanctions, blacklists, and politically expose person (PEP) lists.
Why There is a Need for Customer Due Diligence?
The obligations included in CDD are mention below:
- Verify Customer Identification: Companies are required to identify their clients by getting personal information and data from a trustworthy, independent source, such as name, picture ID, address, and birth certificate.
- Ultimate Beneficial Owners’ Verification (UBOs): Companies should try to identify ultimate beneficial ownership when a business or third party is working on behalf of someone else. This is use to describe the person who gets benefits from a people’s tasks.
- Business Relationships: Businesses are required to identify the owner’s name and beneficial ownership, as well as identify the customer’s nature and purpose of their business relationship.
When is it Require to Perform CDD?
Businesses must apply KYC/AML and CDD checks under the following situations:
- New Business Relations: Previous to beginning a new business relationship, companies must exercise due diligence. By gathering this data, they can verify that a customer is not accessing their services. Under a false name and that it will take into account in any future AML/CFT risk assessments.
- Unusual Transactions: Certain irregular transactions need Customer Due Diligence precautions. In some cases, these transactions may involve amounts exceeding regulatory thresholds, or they might involve foreign entities in high-risk jurisdictions.
- Chance for Money Laundering: Companies need to incorporate additional Customer Due Diligence checks if they suspect a customer is laundering money or financing terrorism.
- Continuous Monitoring: Customer Due Diligence is a continuous duty. Companies should often do CDD throughout a commercial relationship. To ensure that customer transactions are consistent with their predetermined risk profiles.
- Non-reliable Documentation: Companies should conduct additional CDD checks when clients submit unreliable or insufficient identification documents to address inconsistencies.
In a nutshell, Customer Due Diligence prove to an important part of financial organizations. As it allows them to categorize customers based on their risk level and proceed accordingly with investigations. As a result, businesses can avoid paying a high amount of penalties.