Customer Due Diligence is a mandatory element for companies and regulated institutions to fulfill. Continuing operations without appropriate due diligence are harmful to businesses from a regulatory standpoint in CDD know your customer non-compliance fines, penalties, and reputational damages. CDD effectively manages the risk, protects individuals and businesses against involvement in illicit activities and financial crime.
Basically, Customer Due Diligence allows a business to identify the customer and understand their activities.
Financial institutions are mandated to fulfill due diligence requirements pertinent to CDD at the minimal in accordance with the risk posed by customers by default. Additionally, other levels of diligence like EDD or SDD can be applied based on the risk profile presented by the customer. In order to improve CDD for businesses, let’s look at how that can be achieved through better practices.
Perform CDD-Customer Due Diligence Measure before establishing business relationship
Before on-boarding a customer, businesses need to be clear about their customer’s background. This can be achieved by employing CDD measures to gain appropriate information from them, this includes identifying the identity of the customer and their location. Additional information regarding address and business type and nature can also be collected. This process will ensure a business only accepts customers that fit their risk-profile and are least likely to harm in the future.
Know who your third parties are
Most companies would seek a third-party CDD provider to perform the due diligence on their behalf. These include other intermediaries that are defined under AML acts of most countries. Companies need to be careful before handling roles of CDD to third-party help. As the final responsibility of CDD results is not on the third party but on the company that employed their services.
Ensure protection of collected information
Whether it is the company or third party help, the direction to secure collected CDD know your customer data should be the call of any company. Or select third parties that exhibit an agreeable standard of CDD data security. This shall ensure prevention from data leaks and breeches. In addition to mitigating risk at a daily level for businesses.
Assess if EDD- Enhanced Due Diligence is applicable
Customers can post risk greater than that covered by default CDD measures. It is crucial for businesses to ascertain whether the particular customer possesses a higher risk that requires EDD to be applied. To determine that might require ongoing monitoring. Each jurisdiction has their own respective requirement to carry out EDD measures. For some, it’s individuals with compromised/exposed statuses or high-transaction accounts. According to the extent of the risk profile, the appropriate checks can be applied.
It’s important for businesses to understand that KYC by itself is no one-time process. It should be considered more holistically by businesses and risk factors need to be taken into consideration more seriously. The procedure of KYC is not just limited to Identity Verification for KYC, but appropriate CDD measures as well. These should be applied according to the risk profile possed by the customer. Appropriate measures should be sought after the implementation of the CDD measures if required, as stated in the steps highlighted above.