The practice of conducting background checks on prospective customers in order to evaluate the risk prior to onboarding is known as Customer Due Diligence or CDD. The goal of CDD, which is carried out in accordance with KYC and AML regulations, is to assist financial institutions in preventing unlawful activities including fraud, human trafficking, money laundering, and the funding of terrorism.
Financial institutions gather and validate data as part of Customer Due Diligence, including name, address, and a few other factors. While this is true for onboarding new employees, CDD is also practised by corporations. Businesses, especially those handling sensitive data and services, use Customer Due Diligence to make sure they adhere to legal requirements.
Regulators throughout the world are growing more strict in their enforcement of compliance standards and rules, and they are punishing non-compliant enterprises with greater fines or penalties. Know more about Customer Due Diligence today, if you are part of similar companies or businesses.
Different types of Customer Due Diligence
Customer Due Diligence primarily consists of two types – Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD).
Regulators allow a shortened due diligence procedure when the perceived risk is lower. This Customer Due Diligence modification is known as Simplified Due Diligence. Examples include High Net Worth Individuals (HNIs) or public sector organizations that have steady financial streams.
On the other hand, when the risk perception is higher, enhanced due diligence, which is more extensive due diligence, is undertaken. EDD is strongly encouraged for prospects who are politically exposed (PEPs) or who do a lot of business with foreign nations.
If SDD or EDD should be used, businesses often employ a preset decision matrix. This decision matrix might be determined by factors like transaction value and client profile. For those who satisfy the standards, businesses are allowed to use SDD to reduce the time and labour required for prospect verification. EDD, on the other hand, does a number of additional checks to verify information on the sources of funding, the location of the business, etc.
3 important things to know about Customer Due Diligence
Here are the three compulsory things you need to know about while dealing with Customer Due Diligence:
Verification of a customer
Getting a basic understanding of the client is the first stage in Customer Due Diligence. To receive data on a customer that is a company, including information on beneficial owners, it is important to obtain original or certified copies of the records that attest to the business’s legal foundation and shareholders. They consist of documents like memoranda, certificates of incorporation, and articles of organization.
Choose the appropriate due diligence path
Businesses can decide between conventional, enhanced, and streamlined due diligence depending on what they know about a consumer. For instance, if a bank learns that a customer is a government official (a PEP), it can continue the onboarding process of the individual, but an extra check is necessary.
The story doesn’t end when you enrol a client and establish a functional relationship. It is still being regularly observed. Customer Due Diligence must go on since there is always a chance that a customer’s profile may change over time. For instance, they may undertake a high-risk transaction, let their ID expire, or get up on a PEP list. By monitoring customer profiles and transactions, businesses may respond to any unexpected crises.
With the help of Customer Due Diligence risk is reduced, client understanding is increased, and adaptive systems are made possible by effective continuing compliance. A transparent corporation with sound governance may be created by establishing attitudes and practices that encourage ongoing attention and respect for legal and regulatory requirements.