Identity Verification, KYC

Why Do We Need Customer Due Diligence?

Growing strictness of compliance regulations means that companies must improve their customer onboarding processes. That’s why, when running a company related to finance, it is worth having a documented CDD procedure in place. Customer Due Diligence allows checking what kind of customer we can deal with and allows you to control their activity within our company.

Currently, CDD is one of the standard processes used during client identity verification. It is not complicated and allows constant monitoring of clients and obtaining basic information about them. This can significantly contribute to increasing the security of the company and the relationship with the user.

After the breakout of the Panama Papers scandal, countries around the world introduced new regulations that obligate financial institutions to improve their security. These regulations are intended to stop similar situations from happening in the future. This is why the introduction of the CDD is so important. Thanks to this, companies receive a lot of important information related to the past and current state of their clients. On this basis, they can determine the level of risk associated with the transaction with a given service recipient and constantly control their activities, monitoring various changes that may affect further cooperation.

So why should companies pursue a process like CDD?

When we establish cooperation with a new client, we want to know everything or as much as possible about them. We learn their name, address, and other important personal data. CDD (Customer Due Diligence) helps to gather this information. This allows you to protect your business from potential fraud. For example, it may happen that if a customer fails the AML (Anti Money Laundering) procedure, then in some countries they cannot execute a transaction above a certain amount. It depends primarily on the anti-fraud regulations that have been made by specific countries.

For example, in the US, the US Department of the Treasury has issued a guide (link) that talks about CDD and the need for businesses to do so. The European Union has also introduced special directives (link) requiring the implementation of AML procedure, which are related to Customer Due Diligence. Thus, by introducing CDD in our company, we are sure that we meet all standards and regulations.

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What exactly is Customer Due Diligence?

Customer Due Diligence is about monitoring the customer and their activity, which allows you to control their activities. This increases the likelihood that the customer who is already known to us is still the same person they claimed to be and performs exactly the same activities as the time of first verification. This prevents, among other things, the transfer of accounts to people who would not have passed this verification.

CDD is primarily one of the security measures that allow you to increase the security of the company. Thanks to this process, the risk of fraud is reduced, and hence the losses to which their customers are exposed.

CDD in few simple steps

The entire Customer Due Diligence process can be divided into three steps:

Customer identification and basic information: companies identify the customer on the basis of basic personal data, i.e. name and surname, photo of the ID document, address, phone number, e-mail address, but also for example birth certificate;
Risk assessment: based on the customer’s personal data, place of residence and the type of business they run, it is possible to calculate the level of risk associated with fraud or the possibility of money laundering. The level of threat posed by a given customer indicates how much due diligence should be put into their identification. The greater the degree of risk, the more accurate the CDD must be than with a low degree of threat from the client;
Ongoing monitoring: The CDD does not stop when the client is accepted. It lasts all the time, until the customer resigns from the services. It is necessary to constantly monitor the client, especially those with a high degree of risk, control suspicious transactions or change their place of residence. At the same time, you should also keep an eye on customers who at the beginning carried a low risk, because at any time they might become, for example, a public figure;
An additional step that has gained popularity after the Panama Papers scandal is business information: checking the client’s business model, collecting information on financing and benefits related to a given business.

CDD helps determine the risks business may face. Therefore, there are several ways to perform this process correctly.

Categorizing clients based on the risk they carry, keeping their data safe and moving it if the new regulations occur;
Before starting the cooperation with the client, it is worthwhile to create a general profile to know with whom we are dealing with and be able to detect possible fraud attempts at an early level of potential cooperation;
Determine whether Enhanced Due Diligence (EDD) will be needed.

When do we need EDD?

Sometimes CDD alone is not enough, this is when EDD (Enhanced Due Diligence) should be implemented. It is useful when we deal with PEPs (Politically Exposed Persons), i.e. public figures, mainly politicians who may be involved in money laundering. Additional checks may include:

Use of additional materials for identification;
Determining the source of income and financing of the client and his assets;
A closer analysis of the reasons for transaction or the origin of the business;
Constant monitoring of the ongoing procedures.

Thanks to this, we can exclude people with whom it is better not to start a business relationship or learn about who to pay special attention to and whose movements to watch with increased vigilance.

Ongoing monitoring

One of the components of EDD is ongoing monitoring, which allows for constant monitoring of transactions that the client makes. It is necessary and extremely important to control all movements, even those performed less frequently. Not every transaction has to be immediately considered suspicious, but by controlling the client’s actions, one can learn whether, for example, their risk or business profile will not change soon. Ongoing monitoring consists of:

Monitoring transactions to ensure that the transactions client makes have a similar level of risk to that which was initially granted to them;
Responding to any changes in the risk profile or any movement that might raise suspicion;
Retain necessary data, recordings, documents and other information that may be useful for a CDD.

Ongoing monitoring should apply to all business relationships, but it can also be used to reflect the client’s risk.

CDD by Fully-Verified

If institutions need the full knowledge of the customer to be sure that they will not be used for suspicious transactions or money laundering, they should mandatorily introduce CDDs. Thanks to this, they can reduce the risk posed by a potential client and keep track of their actions.

Fully-Verified can help in this, where among a wide range of KYC services , identity verification is based on CDD and EDD, both for onboarding and ongoing monitoring. In addition, verification of residential addresses, sanctions lists, and PEP can be performed. Thanks to this, companies supported by Fully-Verified will have extensive knowledge about their client or business partner.

Remember that by introducing Customer Due Diligence in the company, you not only increase security but also gain customer trust.