Customer due diligence (CDD) is a basic requirement for every financial organization to verify any new customer before initiating a customer-business relationship. Every financial organization needs security to process its business. For this purpose, every customer is legally required to get verified by a customer identification program
Customer due diligence is the process of verifying a customer’s identity by checking who they claim they are to be. For this purpose, financial organizations are required to integrate a customer compliance technology that helps them to facilitate the compliance process. With the use of AI-powered technology, automation processes facilitate businesses by enhancing the onboarding of customers and reducing the risk of compliance errors. AI technology smoothes the way for the Customer due diligence (CDD) process by using customer risk profiles to improve customer compliance by creating AML customer due diligence and CFT due diligence alerts. Similarly, AI-powered technology helps financial organizations adjust to changes in AML/CFT legislation.
This blog will discuss why customer due diligence is important for financial organizations and how it can be beneficial for customer compliance.
Customer Due Diligence
The process of verifying the customer’s identity by assessing and monitoring their potential risk factor is called Customer due diligence (CDD). Moreover, it improves customer relationships by ensuring customer compliance with regulations. The process of CDD involves collecting data to verify the customer’s identity and determine if they are involved in any illegal activity. This helps foster a strong customer-business relationship.
CDD works simultaneously with KYC process but both processes have some differences in functioning. KYC involves the verification of new customers while CDD involves ongoing monitoring and assessment of customer activity. There are different types of CDD processes based on the customer’s risk profile, which are as follows:
Variations in Customer Due Diligence
Simplified Customer/Client Due Diligence
Situations involving low-risk customers typically include conducting simplified checks of public enterprises and customers with reliable sources of funds.
Enhanced Customer/Client Due Diligence
Situations involving high-risk profile customers are examined through the Enhanced customer due diligence process. It includes requesting more in-depth verification of different sources of funds as well as senior management approval before starting a customer-business relationship.
Why is Customer Due Diligence (CDD) Needed?
Customer due diligence is important for businesses to manage the potential risk associated with various financial crimes i.e., money laundering and terrorism financing. It increases customer’s satisfaction by improving customer-business relationships.
How does Customer Due Diligence (CDD) Work?
There are a few steps involved in the process, which are as follows:
Step 1: Identification of Documents
The first step involves the collection of the customer’s identity documents including passport, id card, driving license, and Address with verified document documents including bills, and bank statements issued by the Government.
Step 2: Verification
The second step is the verification of customer’s documents by passing them through security checks in order to ensure the high-security level.
Step 3: Risk Assessment
The third step is to assess the risk of potential clients based on the verified documents involving business activity, country, and financial profile.
Step 4: Monitoring
The last step is to monitor the customer risk profile to proactively mitigate any threat posed by the customer.
Lack of Customer Due Diligence
Lack of Customer Due Diligence procedures may result in the following:
- Money laundering
- Fraud
- Regulatory sanctions and fines
- Terrorist Financing
Customer Due Diligence in Banking Industry
Customer due diligence services are very essential for the banking sector. It proves to be an important tool for anti money laundering (AML), human and drug trafficking and fraud. Others factor that are important in banking includes:
Building Customer Relationship:
Customer Due Diligence helps in building Customer-Business relationships by checking the customer risk profile assessment and verifying the fake identities of customers.
Occasional Transactions:
Customer Due Diligence is a valuable tool in Banking Transactions , as it helps detect higher-risk individuals or regions.
Suspicious Activity:
Customer due diligence also checks whether the customer is suspected of any illegal activity i.e., money laundering and financing terrorism by enforcing the Anti-money laundering customer due diligence Rules and obligations in banking.
Unreliable Identification:
If the information provided by a customer is not reliable or suspicious then banks are required to implement additional customer due diligence measures.
Conclusion:
Due to the advancement of technology, Digital automation processes make it easier for financial organizations to assess the risk of a potential customer risk by reducing the risk of financial crimes. Fraud costs $5 trillion globally each year. KYC and AML regulations are designed, and implemented by CDD processes that ensure that financial organizations are not financing money laundering, terrorism, and any other criminal activity. Customer due diligence assists financial organizations in enforcing the laws relevant to fraud, money laundering, and potential terrorist funding. CDD not only protects the companies from financial loss but also protect the company’s reputation by preventing illegal activities.
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