Customer Due Diligence

The unprecedented surge has digitized the world. The scammers are upgrading themselves and utilizing advanced techniques to proceed with illicit activities. The Federal Trade Commission (FTC) report received 1.1 million identity theft reports in businesses, especially during customer onboarding. The FTC also reported 85,000 identity theft cases in three-quarters of 2023. 

To combat identity theft as well as various financial crimes, the International Financial Action Task Force (FATF) and governing bodies are obligated to rigid regulations. Companies must conduct customer due diligence (CDD) to comply with these client verification regulations. It enhances financial institutes such as banks, insurance, Fintech, etc., security and protects them from money laundering and terrorist financing. 

What is Customer Due Diligence? 

Financial institutes and businesses must authenticate they are onboarding legal clients. They have to verify the customer’s and businesses’ authenticity by customer due diligence (CDD). In order to make sure that clients and businesses are not engaged in illegal activity, CDD is utilized for verification. This method strengthened security and helped them to adhere to anti-money laundering (AML) laws. Additionally, CDD aids in identifying possible transaction risks like financing terrorism or money laundering. Additionally, it serves as a deterrent to those looking to engage in illegal transactions. CDD compliance requires companies to collect and evaluate information submitted by a customer or business. It is an essential operation, especially for organizations in the financial industry for Financial Crime Compliance (FCC).

Types of Customer Due Diligence? 

To reap accurate results during the client verification process, companies divide CDD into different steps. These all have their own customer due diligence checklist according to the risk assisted by the client. These series of checks in the CDD types support companies to verify customers adequately and mitigate risk. Below are the three types of customer due diligence used internationally to verify clients. 

• Simplified Due Diligence

The simplified level of due diligence, where the customer risk assessment process has proved the customer business has a low risk of being involved in money laundering and terrorist financing. Companies comply with the simplified due diligence with these businesses and customers with low-risk levels. In most of these cases, financial institutes did not verify the customer’s identity, only authenticate the client and onboard. 

• Standard Due Diligence 

In the second level of due diligence, companies ensure the customer’s source of funds most of these are employees of other companies. They have to show their salary statement or other funding source for onboarding. This aims to verify the nature of the business they are working in or with and take serious measures if needed. In this, companies verify the clients’ identity and income source to confidently onboard and ascertain they are not earning from illegal activities. 

• Enhanced Due Diligence 

The EDD is used for high-risk business verification. The aim of the EDD is to disclose the politically exposed persons (PEPs) and customers from high-risk nations. EDD is most used in financial and virtual asset service providers (VASPs). It involved more stringent and rigid measures to collect in-depth information about the client and reap accurate results. EDD also helps the companies compile a better customer risk profile for ongoing monitoring.

Difference between CDD and EDD

Know-your-customer (KYC) is rolled out on two separate tires: Customer Due Diligence and Enhanced Due Diligence. Nonetheless, both are employed to validate the client and companies. These support financial institutions and organizations in adhering to global anti-money laundering regulations. 

• Risk Level 

The primary difference is that CDD is used at the basic level of risk, which involves verifying the customer and business authenticity with fewer checks. The EDD is used for customers who fall into the high-risk categories and require further scrutiny. Customers are linked with PEPs, illegal sources of wealth, and businesses operating in high-risk industries.

• Investigation Technique 

In the CDD, companies only collect simple information, including name, address, date of birth, and other normal details. After that, they verify this information against one or multiple original documents, such as government-issued ID, driver’s license, or passport.  

EDD, on the other hand, is a more comprehensive and detailed verification process. Where the simple CDD checks are to verify customers, the enhanced customer due diligence authenticates clients and companies with rigid measures. 

• Ongoing Monitoring 

In the CDD, companies regularly monitor the customer account to detect any suspicious activity or irregular transactions from the account. EDD also requires real-time monitoring of customer transactions after onboarding. Supervising the transactions in the EDD is more in-depth to conclude the risk associated with their activities.

Which Industries Should Utilize CDD? 

Compliance with AML regulations is a must for companies and various financial institutes. It ensures the organization is secured from money laundering and terrorist financing. The measures can differ from one but according to the essential jurisdictions, the given companies have to comply with AML regulations. 

• Banks and financial institutes 
• Virtual asset service providers 
• Insurance companies 
• Real estate industries
• Gaming and gambling sector 
• Precious metal dealers 
• Attorneys 
• Securities firms  

These are the basic companies that have to comply with the AML obligations to combat financial crimes. It is essential to remember that specific regulations and requirements can vary by country. The businesses should familiarize themselves with the AML laws in their jurisdictions.