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customer due diligence

Customer Due Diligence – Mitigating Fraud Risks in Financial Services

Table of Contents

Customer Due Diligence in the KYC Process

KYC regulations must adhere to due diligence in order to prove your compliance. Implementing due diligence on your customers tells you about customers precisely who they are. In terms of AML and counterterrorism funding, you should determine if the company you intend to deal with has an ultimate beneficial owner.

Once you have completed the identity process for your customer and assessed their risk level, after this you can decide the process for the customer to continue using the Due Diligence financial services, Simplified Due Diligence (SDD), or Enhanced Due Diligence (EDD).

Here are some checkpoints: Customer Due Diligence (CDD) requires you to monitor an account regularly which includes the changes in the profile, transaction details, and illicit activities if they happen.  

Know Your Customer CDD Checklist

Here are some points that must consider when dealing with new customers during KYC customer due diligence.

  • Before making a bound with the end-user, make sure the risk profile of the customer matches your policies.

It involves the knowledge of the customer’s identity.

  • Customer’s full name and their residential address on its own, and legal address for any business organization.
  • Pictures for identification, such as Video KYC, or identity proof documents.
  • Customers’ intention to join any business organization, and their source of funding/income.
  • Verify the customers if they are part of any sanction lists, blacklists, and others that might increase risk.
  • Assess the risk level to define the Customer Due Diligence

This is the point where onboarding specialists must have knowledge about the type of CDD required for the customer profile.

  • Standard Customer Due Diligence: It involves illicit activities with low to medium risk, such as money laundering and terrorist financing, and does not require complete Customer Due Diligence (CDD). customers are categorized into low or medium-risk profiles.
  • Simplified Due Diligence: it is the simplest level of due diligence that can be done for the customers. This due diligence is consider, where the customer is involve at low in money laundering or other illicit activities.
  • Enhanced Due Diligence: If a customer is deemed to be high risk. You need to improve AML procedures. Unlike CDD and SDD, customers found with high-risk profiles will undergo deep screening for investigation for their illicit activities.
  • Keep the CDD record safe

During the investigation or auditing process, you must show that you have done every single step to decrease the risk of illicit activities. This is why it is important for your analysts to hold the CDD records during the process.

You have to present during an audit event, the reasons why you took the decisions that you did, on the basis of thorough research.

Enhanced Due Diligence (EDD) in Financial Institutes 

Enhanced Due Diligence (EDD) is a process of KYC, that includes a higher level of inspection of potential business partners and indicates the risk that is unable to identify in Customer Due Diligence (CDD). EDD is much better than customer due diligence, used for a higher level of identification by verifying customers’ identity and address and assessing customers’ risk level to categorize them.

 Enhanced Due Diligence was introduce to handle high-risk customers and a huge number of transactions. Because such customers and monetary exchange can lead financial organizations to high risks. 

There are some features that make EDD different from KYC general regulations:

  • Thorough and Robust: EDD Banking policies are “Thorough and Robust” that provide expressively more authentic and detailed information. 
  • Detailed Documentation: The whole EDD procedure is document in detail, and regulators can access these reports on an immediate basis. 

Enhanced Due Diligence Advantages for Financial Institutes

Here are some advantages for financial organizations expect for avoiding penalties and regulatory scrutiny: 

Improve the Reputation of your Organization

When you thoroughly examine your customers with enhanced due diligence, you can keep your organizations away from money obtained by illicit means such as money laundering, money from corrupt people, and terrorists. The help of such preventive measures for your organizations at early levels will improve the reputation of your organization.

Discourage financial crimes

Knowing your customers, verifying their identities, making sure who they say they are, assessing the level of risk. And ensuring that they are not on any sanctions lists or blacklists, all these steps are taken to avoid money laundering.

Customer Due Diligence means for Financial Institutes

 Financial organizations worldwide almost made the monetary exchange in billions every day. This is why this industry has to place its leading position, to keep away from unintentionally helping by getting to know its customers in criminal activities before onboarding and monitoring them. 

To sum up, due diligence can prove as an essential part of financial organizations. It can help to categorise the customers according to their risk level. And proceed with an investigating process accordingly. As a result, an organization can prevent itself from paying huge penalties.

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