Before hiring a staff member, organizations make sure that they are going with the right person for the job. Similarly in the financial industry companies have to make sure that they are onboarding the right client to lessen the chances of money laundering and fraud. In order to do that, they need the assistance of customer due diligence.
Customer Due Diligence (CDD)
In order to onboard a client, financial organizations run proper background checks and screen them to see if they appear in any fraudulent activities and ensure that the customer is risk-free. This process is referred to as CDD.
Customer due diligence plays a vital role in Know Your Customer (KYC) and Anti-Money Laundering (AML). The main goal of CDD is to prevent the financial sector from becoming the victim of fraud, terror finance, drug, or human trafficking.
How Does CDD Work in Banking:
A well-planned customer due diligence includes gathering excessive information on clients as long as they have a connection with your organization.
- Client’s Information: Ensure that the client is not pretending to be someone else by gathering detailed information like their name, address, photo verification, and contact details.
- Business Information: Gathering detailed data about client’s business, like what kind of business model they follow, who is financing them, and other important information
- Risk Assessment: Based on the data gathered on the client, banks assess them to check if they can pose any threat to the company and marked according to the threat level (low, medium, and high)
- Ongoing Monitoring: After onboarding a customer, CDD keeps monitoring the customers, especially the ones that are high risk and pose threat to the company.
Nine basic steps that every firm might follows are:
- The client provides the name and address and other related information through an online form.
- A picture of his government ID documents like passport, ID card, license.
- The client takes a selfie so the system can cross-match it with the picture present on the ID.
- Banks and firms check databases to ensure that the person really exists
- Then the system checks if there are chances of fraud and double-check the customer’s IP address.
- After this, the client is screened through blacklists and PEP lists
- Sometimes the address is not present on the ID, banks ask clients to present proof of address by providing a copy of a utility bill or bank statement
- After the assessment clients are flagged according to the risk they pose to the organization, if they are a high-risk client then the organization assess them manually before making a final decision
- After the onboarding process, customers are monitored on a regular basis.
There are several banks out there, and each one of them follows its own approach to CDD based on these nine steps. After the success of these steps, banks will be able to know, that the client is really who they claim, and if their risk profile poses any threat to the company.
For clients who do not pose a high risk to the company, their process is quickened and shortened to two hours making this streamlined process 40% more productive than the manual. On the other hand, for high-risk individuals, the average timeline is between 2 to 3 days.
Enhanced Due Diligence in Banking
Is a KYC strategy that creates a higher amount of scrutiny for possible business alliances and showcases the risks that customer due diligence can not pinpoint. EDD compliance goes much farther than CDD to create a wide range of identity verification by accessing all the data available on the customer, and the level of threat he poses to the company.
EDD is intended to focus on high-risk as well as high-net-worth clients and monitor hefty money transfers. Since these clients and money transfers suggest higher risk in the banking sector, they are strictly controlled and supervised to make sure that everything is in order.
One difficulty with enhanced due diligence is, determining how much data regarding a particular client is required. Authorities have continuously favored strategies in which banking institutions use documented policy and protocols to showcase reasonable evidence while also allowing authorities to digitally audit the rulings of banking officials.
Banks have begun merging the online ID authentication process and anti-money laundering screening throughout the onboarding process, successfully eliminating two birds with one stone.
With the help of customer due diligence banks don’t just get the benefit of avoiding fines and penalties, also helps them serve their clients better, boosts the reputation of their brand, lessens the financial crime frequency, and builds trust among clients and the organization.