Simplified CDD (Customer Due Diligence)

SCDD is performed when a customer, business relationship, or a transaction is considered lower risk. Then the CDD does not have to be as thorough and comprehensive. In this case, ongoing monitoring is applied, but to a reasonable level that is sufficient to guarantee that no unusual activity is completed unnoticed.

Enhanced CDD (Customer Due Diligence)

A company needs to apply ECDD measures when:

  • customer is a politically exposed person,
  • customer has an existing business relationship with competitors,
  • customer is based or living in a country that is considered a “higher-risk”, where the AML/CTF regulations are less strict

The EU is mandated to identify and list High-Risk Third Countries, and 5th AMLD provides a list of minimum requirements for customers from those countries.

Besides completing the necessary steps of CDD, Enhanced CDD obliges to obtain additional information regarding:

  1. Customers identity.
  2. Beneficial owners.
  3. A source of a customer’s wealth and funds, etc.
  4. At last, it calls for enhanced, ongoing monitoring of the business relationship.

As regulator’s requirements grow, embedding automated solutions into financial institutions systems becomes crucial. For example, the first step of CDD consists of checking various databases and gathering information about the customer. This step can be reduced to a simple and quick process when using automated systems. Otherwise, it is a laborious task of gathering all the information manually, putting them into spreadsheets and only then analysing them.

How will regulations affect obliged entities?

In July 2018 the European Parliament adopted the 5th AMLD. The Member States of the EU have time to adopt them by January 2020. The change in legislation will force regulated entities to revise or create their AML programs.

The 5th AMLD includes virtual currency platforms and custodian cryptocurrency wallet providers. They will be obliged to take those regulatory changes into account and create their own AML programs. In particular, requirements that will have a great impact on them are:

  • Full user identification,
  • Forbidding anonymous transactions,
  • Restrictions on the use of prepaid cards.

Setting such a high standard when it comes to AML compliance may have its pros and cons. The more controversial disadvantage will be the prohibition of anonymous accounts, which for some was an important part of cryptocurrency culture. The advantages consist of being less vulnerable to illegal activities and gaining the trust of customers, investors and traditional financial institutions.

For all the obliged entities some changes and revisions will be necessary:

  • Taking into consideration the list of High-Risk Third Countries.
  • Establishing formalised procedures to gather and update the information on beneficial ownership.
  • Applying all the requirements of the ECDD.