Truth be told, your go-to financial institution, aka, your neighborhood bank, can never have enough information about… you, their loyal customer. In fact, your bank’s fundamental job is not only to serve you, it’s also to protect you, and your assets – deposits, stocks, bonds, currencies, and a long list of other valuable personal or business investments. With the surge in money laundering schemes, cybersecurity breaches, and credentials and credit card theft, your financial institution, and other organizations, are going the extra mile to maintain regulatory compliance and safeguard their customers from irreparable damage, and potential financial ruin. And they consistently stay ‘in check’ by collecting, analyzing, and processing reams of customer data.
Financial institutions must establish that their customers are not involved in any illegal activities to protect themselves. In other words, to confirm that customers are exactly who they claim to be, be it reputable business owners, recognized company shareholders, or are gainfully employed by a legitimate organization. All of these checks and balances are to rule out any potential risks of customers being involved in financial crimes, such as money laundering, drug cartels, or illicit gambling operations.
Welcome to the world of Customer Due Diligence, commonly referred to as CDD. It’s the stringent process financial institutions, businesses, and other organizations use to gather information about their customers, to identify and mitigate potential financial risks, flag them, and in word, ‘catch a thief,’ red-handed. The CDD process is not an ominous as seems, and it has strict rules and regulations of its own. Let’s deep dive into what you need to know about CDD, and how, when in place, it can make or break a customer, and take down their illegal financial activity.
What is Customer Due Diligence (CDD)?
As its name suggests, Customer Due Diligence is all about the customer, or in lay terms, being ‘diligent,’ about an individual by investigating and authenticating information with regard to their identity, and financial and business activities. Typically, collecting and verifying information about a customer is performed when establishing a business relationship, prior to the onboarding process, and can include the customer’s name, address, and other personal data. Take, for example, a bank that may require verifying a customer’s passport before allowing them to open an account and make a deposit. Equally important, CDD also involves continuous monitoring of these activities, to detect changes or red flags that might indicate an increased risk of illicit activity.
CDD is also an integral part of a financial institution or organization’s risk management. Typically, these are strategies that dictate how these organizations intend to assess, respond to, and monitor risk. The CDD process effectively acts as a catalyst, by making the perception of ‘risk’ transparent to the organization, where its findings are routinely used in making both investment and operational decisions. CDD is required by various laws and regulations, including the AML, (Anti-Money Laundering) Act, and KYC, (Know Your Customer), the AML best practice for financial institutions to verify customers’ identities, and assess their risk profile.
Why is CDD a must-have for financial institutions?
Financial institutions and other regulated organizations apply CDD processes to stay compliant with AML regulations, and to proactively mitigate fraud-related risks by verifying their customers’ (and their documents’) authenticity. Simply put, CDD helps these organizations to fulfil their legal obligations with timely reporting on suspicious activity, and complying with the laws and regulations designed to prevent financial crimes. Customer due diligence isn’t just a legal requirement. It is, hands down, every company’s duty to help combat financial crime, and other malicious activities. Here are the top 5 reasons why financial institutions need CDD:
- Helps fight financial crime – Namely, money laundering, where illegal transactions of tens of billions of dollars every year, result in severe personal, business, and economic damage.
- Maintains greater transparency – With global governments cracking down on money laundering schemes, drug cartels, and online gambling, greater transparency results in greater enforcement.
- Digital identity verification – Ability to verify customers’ identities, including digital scans, biometric facial recognition, and digital fingerprints.
- Avoids costly fines – Financial institutions or other regulated businesses without sufficient AML processes in place, are more susceptible to exceedingly heavy fines.
- Prevents transactions with suspicious, high-profile customers – Flags/alerts on government officials or business leaders from potentially corrupt foreign regimes.
What are the different types of CDD?
Customer Due Diligence is divided into two distinct categories: Simplified (or Standard) Due Diligence (CDD), and for essentially high-risk scenarios, where more detailed and ‘enhanced’ identity verification is required, you guessed it, Enhanced Due Diligence (EDD). Let’s take a look at both types of CDD.
Simplified Customer Due Diligence
Simplified CDD is, as its name implies, is the lowest level of customer due diligence that a financial institution can employ. It’s implemented when a basic customer risk assessment procedure has yielded reasonable, even anticipated results, showing a zero to low probability for illicit activity. Typically, in SDD scenarios, the financial institution or organization is only obligated to identify the customer via standard photo ID, e.g., valid driver’s license, and not via a comprehensive identify verification process. Well suited for potentially low-risk customers, SDD does cover all of the necessary CDD procedures, but essentially, the verification process is less arduous and time consuming.
Enhanced Customer Due Diligence
Enhanced CDD can best be compared to CDD for the ‘big leagues,’ as it provides the procedures required for high-risk customer assessment and verification. EDD involves determining, based on a risk-based approach, to investigate particular clients more thoroughly – requiring significantly more evidence and detailed information about reputation and history to be collected. In short, when ‘suspicions are high,’ EDD is in full swing, and it’s performed when the financial institution or organization suspects a high level or even traces of potential money laundering or other fraudulent activity.
So, what’s the major difference between CDD and EDD? It’s actually the number of assessments, verifications, and potential red flag follow-ups conducted by the organization. In fact, EDD can and does go even further, with specific requests on the various sources of funds, especially cash, establishing the purpose of a given transaction, and continuously monitoring the customer’s activities should they suspicious change or fluctuate in any way.
Can automated CDD processes help reduce financial crimes?
The answer is unequivocally, yes. No matter the size and scope of a financial institution, be it a large bank or smaller credit union, when CDD processes are powered by technology-based, automated systems, information is always up to date. Today’s Machine Learning (ML) and AI-driven processes enable financial companies to enhance customer risk profiles by integrating reams of data from external sources, e.g., government agencies, making it easier, more secure, and more efficient to identify potential high-risk customer activity.
Reliable CDD is an essential component in the fight against financial crimes. Combined, advanced ML, AI, and automation, have rendered CDD a highly-reliable, insights-driven procedure to create comprehensive views of customer risk. Automated processes not only generate alerts, they prioritize and flag suspicious data, and can even recommend required mitigation. Further, automated CDD processes are in sync with industry best practices, compliant with regulations and standards, effectively reduce the time, resources and costs required to manually perform CDD.
Today’s financial institutions and businesses are heavily regulated, having to adhere to the most stringent industry regulations, all to combat and reduce financial crimes. It is here that Customer Due Diligence comes into play, and where the critical importance of CDD, lives and breathes. Organizations that fall short on their CDD processes, risk damaging their reputation, can suffer great financial loss, and face legal action. CDD, KYC, and other AML processes, help organizations to not only mitigate these and other risks, but to maintain regulatory and industry compliance. As CDD continues to evolve, and become more sophisticated and complex, financial institutions must turn their attention to their first priority – the customer, and work towards creating smarter, more efficient and more reliable CDD processes.
Interesting in learning more about fully-automated, ML-powered, high-performance fraud prevention solutions? If you’re ready to see AUT10TIX in action, including fast and efficient ID document and electronic data verification, biometric authentication, and more, contact us for a no-obligation call with one of our anti-fraud experts, plus a live system demo.