Most people nowadays perform due diligence without even realizing it. It’s uncommon for someone to make a large purchase like a car without doing some preliminary research.
Banks and financial organizations must know who their prospective clients are before enabling them to create an account, just as individuals must assess major decisions before making them. This is when the need for consumer due diligence comes into play.
What is the definition of customer due diligence?
Customer due diligence (CDD) is the process of identifying and verifying your customers to ensure that they are who they say they are and that they have been adequately risk-assessed before being onboarded. In practice, this entails gathering a customer’s information and comparing it to the information on an official document that verifies their identity.
Customer due diligence (CDD) is at the heart of anti-money laundering (AML) and Know Your Customer (KYC) activities, and it is aimed to assist banks and financial institutions in verifying their clients, ensuring they are not on any prohibited lists, and assessing their risk factors.
Simplified, standard, and enhanced due diligence are the three degrees of due diligence.
CDD definition: the various forms of CDD
CDD is an integral aspect of your risk management strategy. Because various consumers provide different amounts of risk, CDD is done in a risk-based manner.
You should evaluate each customer’s prospective risk level and alter your due diligence strategy accordingly. Standard due diligence processes, which require you to identify and verify customer identities, are appropriate for the vast majority of clients.
Simplified due diligence may be sufficient in certain low-risk settings. Instead of identifying and verifying your customers, you only need to identify them while performing simplified due diligence.
On the other hand, there may be times when ordinary due diligence isn’t enough. In this instance, you’ll need to use extra caution.
Banks must carry out customer due diligence.
As part of KYC and other laws, financial institutions are required to use a risk-based approach to customer due diligence. This is to verify that the company follows local rules and regulations in the markets where it operates.
In banking, the amount of CDD is determined by the type of business-customer relationship and the risk profile of the customer. However, banks must take the appropriate procedures to ensure that the customer is who they claim they are in order to prevent fraudulent activities such as impersonation and identity fraud.
When should you use CDD in banking?
Creating a business partnership entails the following steps: Banks must conduct due diligence before entering into a new customer-business relationship to evaluate the customer’s risk profile, verify who they are, and guarantee they are not using a false identity.
Occasionally, certain transactions may necessitate additional CDD procedures. For example, if the consumer is trading with high-risk individuals or locations, or if the transaction exceeds a specific monetary amount (USD/EUR 15,000).
Suspicious activity: If a customer is suspected of money laundering or terrorist financing, banks are required to conduct CDD checks.
Unreliable identification: Banks should take further CDD steps if the information provided by their customers is unreliable, suspicious, or does not match the standards.
Checklist for customer due diligence
Perform basic due diligence on customers.
Simple investigations, such as identifying and verifying a customer’s identification, are the initial stage. Before or during the start of a business-customer relationship, businesses must verify the identification of their customers. As part of the Know Your Customer (KYC) laws, these obligations apply to all new clients.
Choose any third parties you like.
When conducting consumer due diligence, many organizations choose to collaborate with third parties. This could include lawyers, auditors, or CDD solution providers like online identity verification. Businesses should make certain that any third parties with which they collaborate are dependable and trustworthy.
Solutions for customer due diligence:
Any CDD strategy must allow you to collect and validate basic consumer information. Their name, date of birth, and a photo of an official document confirming their identification and residence address are all required.
To do so, request a government-issued identification document such as a passport or driver’s license. Onfido’s approach, which combines a paper check with a biometric check, first confirms the authenticity of the ID. The photo on the identity paper is then compared to a person’s biometric to guarantee that the document is genuine and has not been stolen.
Other checks and signals can then be layered on top of this stage. Obtaining bank statements or other formal documents, for example, or obtaining information from the electoral register.
Many other obsolete and less secure procedures, such as database checks, do not provide the same level of certainty in your clients’ identities as Onfido’s methodology. CDD and KYC solutions that work are based on a mix of technology and expertise. Businesses should consider evolving their approach to CDD as digital risks and the way we approach business-customer relationships shift.