Beyond Putting Names to Faces: A Primer on Customer Due Diligence

Customer Due Diligence

Customer Due Diligence

Given the nature of business of banks, it’s essential to vet potential customers the same way that they vet their employees. After all, having a clear understanding of what a trustworthy customer is can be part of their own protection. This is where customer due diligence or CDD comes into play. But what exactly is CDD and why do banks need it?

 

What CDD Is and How It Works

At the core of every effective anti-money laundering (AML) and know your customer (KYC) initiative at banks is strong CDD. It is essentially the act of doing background checks on customers to verify their identities and properly assess their risk to the bank before they are on-boarded. After all, customers may claim one thing but their paper trail may reveal a completely different story. So a strong, updated, and thorough CDD protocol can effectively help banks prevent fraud and keep money from reaching illicit activities like drug smuggling or terrorism.

In addition to on-boarding customers, CDD (Customer Due Diligence) is also carried out when banks are about to enter into any new deals and agreements and when they are investigating suspicious activity. Depending on the determined risk level of a customer, the CDD process may be simple or extremely thorough. It is also fast becoming a required part of AML compliance, making it a useful, beneficial, and necessary practice for banks everywhere.

 

Why CDD Matters

Considering what is at stake for banks if a customer intends to make them a party to illegal activity, CDD practices should be at the top of everyone’s priority lists. For one thing, the presence of CDD practices prevents a bank from having to pay large fines for noncompliance. Enforcement is part of every financial institution’s responsibility in the fight against cyber crime, after all. As criminals are becoming more sophisticated and increasingly covert with their operations, CDD protocol can also help bank employees better detect these activities and shut them down.

In addition to complying with the law, banks also project a better and more dependable reputation when they have CDD practices in place. It shows that the bank does not just look out for its best interests, but cares about their customers as well. Banking customers want to feel safe and secure entrusting their cash and assets to a bank. If the bank policies and practices seem too lenient or callous about the customer verification process, it can turn people away. CDD practices matter, and they are there to ensure that banks continue to enforce fair and legal practices while protecting their customers.

 

What Happens During CDD

As mentioned earlier, CDD is a standard practice in banks and as such, it usually follows a specific workflow. It begins with data collection, usually when the customer submits their application to the bank. This usually includes the customer’s full name, address, birthday, contact information, government IDs, and signatures. While this may vary across banks and territories, obtaining this information is vital as this is when banks can start analyzing and screening the customer.

The next stage is evaluating the given data, with the goal of properly assessing the risk category of the customer. Based on the results from the screening, banks can then determine the CDD track the customer belongs to: simplified, for clients deemed relatively low risk; standard, for slightly higher risk clients; or enhanced, for potentially high-risk clients.

At this point, banks can decide on whether the client should be on-boarded, given special treatment, or investigated further. Standard CDD usually applies to the majority of banking customers as they are relatively low-risk and will have passed the initial background check. A bank might decide to ease up on the Customer Due Diligence and put a customer in the simplified category if the individual is a public figure with easily verifiable information or usually does not transact large amounts of money.

Lastly, customers who appear suspicious and require a more careful examination are subject to Enhanced CDD( Customer Due Diligence). This is because they are most likely to engage in money laundering or terrorist-financing, and the bank will need more data to verify their identity. Due to the nature of working with Enhanced CDD customers, senior management will need to step in to approve any professional relationship that the customer wishes to have with the bank. For security reasons, the actual steps to an in-depth CDD investigation cannot be divulged, but more stringent background checks and a more complete overdue of the potential client’s past banking activities are likely to be included in it.

 

After CDD: Continued Monitoring and Automation

Of course, a bank has to stay vigilant and watchful of their customers’ transactions even after the CDD process. Some accounts may get stolen or be handed over to another party to be used for nefarious purposes. In order to catch any fraudulent activity, constant monitoring and random audits still need to be done by banks on their accounts.

With that said, banks can ensure that this monitoring process is done correctly and accurately via automation. Not only will it be a time-saving move, but it can also prevent the bank from incurring hefty fines due to human error. Routine checks can be done digitally while evaluations that require more nuances can be done by a bank employee instead. The automation of Customer Due Diligence processes can be achieved by banks when they collaborate with a digital transformation company that has the framework and the experience to help them do it.

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