Customer Due Diligence (CDD) involves gathering information and data to verify customers’ identities, assess the risks associated with their profiles, and mitigate potential risks, such as money laundering and financing terrorism. Customer due diligence is essential for financial institutions under the Anti-Money Laundering Act.
Customer due diligence involves collecting and verifying information regarding customers and businesses and ongoing monitoring of their activities. This process aims to maintain a comprehensive record of customer transactions and identify any irregular or suspicious behavior.
Aims Of Customer Due Diligence
Customer due diligence eliminates the risks of doing business with illegal persons by checking the following things:
- The customer itself, who submits all the information and documents
- The sanction lists
- Public data sources, company listings
- Private data sources, third-party data
CDD Measures vs KYC
Customer due diligence is closely related to know your customer (KYC), but there are some differences between them. KYC focuses on collecting customer information to verify the identity of customers during the onboarding process, while CDD focuses on ongoing monitoring and assessing customers’ activities. Here are some types of customer due diligence processes:
This basic level is used for low-risk customers and transactions and collects basic customer information.
Enhanced Due Diligence (EDD)
Enhanced due diligence (EDD) is used for high-risk profiles and collects in-depth data and a thorough review to mitigate risks such as anti-money laundering and counter-terrorism financing.
Ongoing monitoring of customers’ activities and transactions to prevent illicit activities and other financial crimes that may cause financial losses. Ongoing monitoring keeps transactions safe by recordkeeping and indicates red flags if any unusual behavior occurs.
Customer Due Diligence Checks
This is the most critical part of the customer due diligence process. It involves collecting information about customers and businesses and verifying customer identities. These checks may include reviewing customers’ documents, obtaining information about clients and companies, and cross-checking with public records.
Customer due diligence checks assess customers’ risks, which may cause illicit activities such as money laundering and financing terrorism. Customer due diligence is typically conducted at the onboarding stage but may be performed continuously to track and record transactions. The type of checks and details required depends on the profile’s risk factors.
Customer Due Diligence Process
Customer due diligence involves gathering customer data during onboarding and ongoing risk assessment and management to prevent illicit activities and help companies fulfill the obligatory legal regulations. The customer due diligence checklist involves
The initial step in the customer due diligence process is to identify customers’ identities. This is achieved by collecting information and data pertaining to customers and businesses. Furthermore, an assessment is conducted to evaluate the risks associated with their profiles. Based on this assessment, appropriate mitigation measures are implemented to control the identified risk factors effectively.
Verify the Customer’s Identity
Once all the information about the customer is collected, the next step is to verify their identities by reviewing identity documents such as passports, licenses, national ID cards, and other public records.
Assess Customer’s Risk Level
After confirming the customers’ identities, the organization will evaluate the amount of risk based on the data gathered and other relevant variables, helping the organization decide the necessary level of CDD.
Collection And Verification Of Additional Information
Depending on the level of CDD measurement, the institutes may ask for additional information and documents from customers and businesses. It involves reviewing identity documents, obtaining institutional references, and reviewing public records and other sources.
Customer due diligence (CDD) is not a one-time event but rather an ongoing process. It requires continuous monitoring of customers’ activities and transactions, as they may evolve and change over time. It is crucial for the CDD process to diligently observe and assess these ongoing activities and periodically update the CDD measures accordingly.
Report Suspicious Activity
If the institutes identify any unusual behavior or suspicious activity, they should report this to the legal authorities according to regulation so they can take proper action or reject the proposal.
Benefits of Customer Due Diligence
It’s obligatory by law to implement AML customer due diligence (CDD) and client due diligence for financial institutions, but it’s not limited to financial institutions. Any organization at risk of being used for money laundering or other crimes can benefit from implementing CDD measures. There are many key benefits to implementing CDD, some are listed below:
Prevent Financial Crimes
institutions can effectively identify and mitigate the risks associated with money laundering and financing terrorism by employing two key practices: collecting and verifying customer information and continuously monitoring their activities. Institutions can proactively identify suspicious or illicit behavior by engaging in these processes, ensuring enhanced security and compliance measures.
Enhancing Reputation And Compliance
Financial institutions can get assistance from CDD to follow lawful anti-money laundering (AML) and counter-financing terrorism (CFT) regulations. Additionally, it contributes to preserving a positive reputation and fostering customer and client confidence.
Customer due diligence saves a business’s reputation and prevents financial crimes by verifying customers’ identities and monitoring their activities. The customer due diligence levels are assigned according to the risk factors associated with the profiles. The enhanced due diligence is for high-risk customers, and standard due diligence is applied to low-risk customers.