Know your customer (KYC) policies are in place so that banks may verify the identities of their customers. The law stipulates that each user must go through the know your customer process before availing of any services from a financial institution. It is essential to acknowledge that the risks of establishing business relations with a fraudulent customer are not nullified after onboarding, which is precisely where CDD in KYC comes into play.
To continually monitor the threat posed by a customer after they have been onboarded, businesses engage in a procedure known as customer due diligence (CDD), which includes checks like sanctions and politically exposed person (PEP) screenings. It may also involve running background checks by checking data provided against databases and biometric checks.
KYC & CDD: A Brief Overview
Know your customer (KYC) and customer due diligence (CDD) are essential to anti-money laundering (AML) regulations. CDD in KYC lays the groundwork in ensuring that the customer complies with all the necessary rules and is actually who he claims to be. In addition, it dramatically impacts your ability to protect against identity fraud and impersonation.
If you’re looking for ID verification solutions, this post will serve as an in-depth guide to understanding how CDD works, its benefits, and how you can streamline the entire process with the help of technology.
How CDD Works
Despite their similarities, KYC and CDD are not interchangeable. KYC is when a company retrieves information about a customer before beginning a business relationship and uses that information to develop a customer risk profile. On the other hand, the CDD will explicitly declare whether or not the information you received is accurate. In addition, proof of ownership of the final utility is required. In contrast to KYC, CDD rules are implemented in a process, and ongoing communication with the customer is maintained. CDD in KYC helps you maintain a real-time register of how your customers conduct themselves.
Financial institutions must conduct customer due diligence based on risk under many international KYC requirements. Thus, further due diligence measures will be taken concerning consumers with the most significant threat. The extent of scrutiny depends on the customer’s risk status and the type of connection they have with the bank. Based on the degree of risk a customer poses, the degree of due diligence required can be divided into two types:
Simplified Due Diligence
Simplified due diligence is an excellent option for customers with little to no risk, such as large, well-known listed companies and high-net-worth individuals (HNWI). For instance, the degree of scrutiny a Russian billionaire faces must be higher than what a public company operating in the same jurisdiction must face.
Simple due diligence does not bypass any of the necessary CDD procedures. Still, it does enable organizations to shorten the duration and scope of the verification process, making for a fantastic user experience.
Enhanced Due Diligence
If a financial institution has determined a party to be medium to high risk, you must perform enhanced due diligence to protect the sanctity of the global financial system. Customers from high-risk countries, PEPs, cross-border diplomatic ties with a sanctioned country, and substantial transaction volumes all fall into this category.
Streamlining the CDD Process
CDD in KYC is one of the most complex parts of KYC protocols because of the lack of clarity in guidelines from governments and inter-governmental organizations. Customers in the modern day expect quick and simple access to banking and payment services, which is incompatible with the conventional method of conducting CDD. Moreover, in a world of ever-changing and ever-increasing regulatory demands, regulated financial firms must find the quickest, most compliant, and risk-appropriate manner to onboard new consumers.
CDD in KYC entails establishing workflows and implementing automation that allows you to monitor the financial activity of a customer during the whole customer lifecycle to ensure that there’s no fraudulent activity. Solutions for customer data protection and knowing your customer requirements can utilize technologies like machine learning for pattern recognition and help a business gain a comprehensive view of the risks associated with a particular customer.
Benefits of CDD in KYC
Businesses risk fraud and penalties for failing to comply with AML regulations if they neglect CDD. But even from a business perspective, there are various benefits associated with CDD in KYC. The most common benefits associated with CDD are:
- More data about your customers and their financial activities allows you to make better decisions from a risk and business perspective.
- It ensures that you can comply with all the laws and regulations that apply to you in the jurisdictions in which you operate. Non-compliance can carry a great deal of scrutiny in areas that are tough to do business in.
- It helps you mitigate risks as a business by giving you a comprehensive view of the kind of risk all your customers pose.
- It allows you to safeguard against deception tactics like identity fraud and social engineering hacks.
- It will enable you to ensure a great customer experience without making conducting business with you arduous.
Customer due diligence, often known as CDD, is the process of gathering identifying information about a client to authenticate that customer’s identification and get a more accurate reading on the level of potential criminal risk that the customer poses. It helps you comprehensively understand the risks you are exposed to while aiding the KYC and AML processes you’re legally obligated to follow.
CDD follows a risk-based approach where the degree of scrutiny differs depending on a customer’s risk. Changing and unclear legislation has rendered anti-money-laundering processes outdated. Most firms still depending on conventional AML measures are at risk. In addition, technology is changing the CDD process, making traditional methods obsolete.
How is CDD different from KYC?
CDD is different from KYC because KYC is conducted before a customer is onboarded. At the same time, CDD is an ongoing process that usually continues for the entire duration that a customer is working with the business.
Does every customer attract the same degree of scrutiny?
No, the customer due diligence process follows a risk-based approach. It means that the degree of scrutiny a customer attracts will be directly proportional to their risk.
How do I ensure that my system to CDD is adequate?
Given the times, it is smart to partner with a technology company that handles everything for you by simply letting you run CDD processes through a series of trusted, well-managed APIs.