Client Due Diligence (CDD) refers to the collection and analysis of data to identify risks a user possesses before onboarding. Criminals are seeking ways to flow their proceeds of crime through various financial systems. By concealing their identities and hiding sources of funds, fraudsters convert ill-gotten funds into clean money. This, ultimately, helps criminals escape AML/CFT controls.
Businesses must carry out adequate customer screening before building partnerships with global firms or registering customers alike. With AI-powered AML customer due diligence solutions in place, industries can assist legit entities. For instance, banks, investment, or trading firms might ask for ID cards along with passports before allowing customers to make online transactions. This blog further provides detailed insight into the client due diligence process.
AML Customer Due Diligence – The Process, its Variations, and Benefits
CDD is a crucial element in the fight against financial crimes. As fraudsters use several techniques to launder high sums of money, industries need to employ more efficient countermeasures. Where synthetic identity fraud helps criminals escape client due diligence checks, AI-powered IDV solutions validate their true identities. This allows industries to mitigate the illicit flow of funds while minimizing consequences such as ending up on sanctions or greylists.
Industries are moving towards complete digitization like the finance sector provides customers with remote due diligence in banking for online payments. Similarly, the emergence of cryptocurrency as a widely adopted investment method is also increasing criminal risks. While these technological transformations are opening doors to progress and ensuring a positive customer experience, fraudsters are trying to exploit them. Therefore, client due diligence is becoming a liability for businesses to secure their operations, especially in digital payment processing.
Fraudsters are taking every possible advantage of high-risk industries by using anonymity and inherent speed to efficiently conceal their true identities. Submitting inaccurate or camouflaged information while posing as legitimate customers has become easier for criminals. This requires businesses to incorporate better AML customer due diligence solutions.
In case of high fraud risks, industries are sure to drive more criminal threats as well as non-compliance fines. As of 2021, industries experienced over $937.7 million in penalties enforced by regulatory bodies. Therefore, client due diligence has become a liability for businesses. Further insights into how CDD varies from commonly known KYC process and variation within it are in the next section:
● Enhanced Due Diligence (EDD)
High-risk cases involving more suspiciousness are put through EDD for more strict screening. These include sophisticated money laundering attempts by politicians, high-profile criminals, and businesses holding a huge worth in the market. Moreover, fraudsters belonging to speculative countries target regions with lax aml kyc regulations to convert their proceeds of crime into clean money.
Considering the increase in criminal threats such as money laundering, regulatory bodies including FATF, FINTRAC, and EU are placing stringent client due diligence laws in place. This involves accurate and efficient verification of customers’ identities. Furthermore, businesses should cross-verify both individuals as well as companies across global Politically Exposed Persons (PEPs) and sanctions respectively.
Enhanced due diligence involves more strict client due diligence in which industries require customers to present additional inflammations. This includes complete details regarding employees or managerial staff, UBOs, and sources of funds.
● Simplified Due Diligence (SDD)
Financial regulators do not conduct complete verification of every customer. However, SDD is more applicable to individuals with authentic sources of funds. Similarly, companies with well-known public recognition also fall under this type of client due diligence check. Customers, as well as firms, possessing less risk of criminal intentions, can easily validate their information through the SDD process.
Transactions exceeding the threshold limit or coming from high-risk countries are subject to more strict monitoring. This requires businesses to conduct complete client due diligence checks rather than relying on SDD.
AML and KYC Regulations – Requirements Regarding Customer Due Diligence (CDD)
Due to the significant increase in identity theft and money laundering cases, regulatory watchdogs are making certain amendments within their aml and kyc regulations. For instance, to combat recent and sophisticated criminal attempts, the EU issued its Sixth Anti-Money Laundering Directive (6AMLD) with more strict fines and requirements. Moving further, the requirements regarding client due diligence includes verification of the following:
Complete name
Identification and tax number
Residential address
Passports
Pictures on government-issued ID documents
In order to cross-check customers’ addresses, the industries can ask for housing insurance documents, bank account statements, and utility bills. However, to verify companies, client due diligence process involves validation of the following:
- Registered name and details
- Contact details
- Trading number
- Beneficial owners
- Complete address of head as well as other offices
Key Notes
Criminals use synthetic identity fraud by either using completely fake or stolen information. This helps them hide their risk score while impersonating legitimate customers. Fraudsters then bypass client due diligence checks while limiting suspiciousness.
Therefore, industries require robust AI-powered kyc money laundering prevention solutions to counter criminals’ efforts. Ultimately, they can provide secure banking and digital payments to global customers with zero compromises on their convenience.
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