Whenever analyzing CFT/AML regimes, CDD (customer due diligence, also known as client due diligence) is a very important component. Customers have to identify clients and make sure they are completely transparent in order to address terrorism financing and money laundering risks. Customer due diligence is a process that runs different background checks based on current legislation and tries to understand a customer’s risk level.
Basics To Be Aware Of
At a very basic level, customer due diligence simply means that the customer’s identity is verified, together with the business that is carried out. The goal is to label him/her/it as being of sufficient confidence level. Different regulatory obligations are mandatory, like:
- Customer Identification – The company has to identify the customer. This is done by obtaining precise personal information, like ID, name, birth certification and address. All the information gathered needs to come from independent, reliable sources.
- Beneficial Ownership – With due diligence measures, the company’s beneficial ownership is identified, in the event that the owner is not the client. This process includes understanding the company’s control structure.
- Business Relationships – Companies have to get information about the business relationship nature they enter, together with the purpose.
When Should CDD Be Used?
All financial institutions need to carry out CDD and KYC measures if one of the following circumstances appear:
- New relationships – Due diligence is necessary before a business relationship is established with a client to make sure that the risk profile is suitable and the identity of the customer is real.
- Occasional transactions – In some cases, an occasional transaction may warrant CDD measures. For instance, when a specific money threshold is passed, this is necessary.
- Money laundering suspicion – Whenever a customer is being suspected of being involved in financing terrorism or money laundering, CDD checks are mandatory.
- Unreliable documentation – If the documents submitted for the identification process are inadequate or unreliable, further CDD scrutiny is mandatory.
Both CDD and KYC procedures are built based on risk assessment. Companies have to assess the CFT/AML risk of every single client and then adjust the due diligence scrutiny based on that. Most clients are subjected just to some standard CDD measures. This usually requires customer verification and identification. A business relationship is also analyzed. When the assessed risk is considered to be low, simple due diligence can be appropriate, with just ID being checked.
Enhanced Due Diligence (EDD)
Some customers, like PEPs (politically exposed persons), are considered to be of a much higher risk of being involved in money laundering. In this case, enhanced CDD measures are mandatory. This can involve:
- Asking for extra customer identification documents
- Receiving proof of wealth or funds source
- Closer scrutinization of the business relationship or transaction purpose
- Ongoing monitor procedures being implemented
When mentioning ongoing monitoring, it means continuous business relationship scrutiny. This is a very important process because most occasional transactions are initially not considered to be suspicious. These occasional transactions might be a part of a behavior or pattern that forms over a long time frame. This can change the risk profile or the business relationship that was initially identified. Ongoing monitoring practically involves:
- Monitoring the transactions done over the entire duration of a business relationship in order to make sure that the risk profile of the client matches the shown behavior.
- Maintaining strict responsiveness policies to risk profile changes or factors that raise suspicion.
- Storage of relevant documents, records, information and data that is needed for further CDD purposes.
All the business relationships established need to go through ongoing monitoring. The same thing can be said about other CDD measures that should be scaled whenever the risk profile of a client changes.