What Is Customer Due Diligence or CDD?

Financial institutions (FIs) are required to verify their customers’ identities & the nature of the businesses they are engaged with. Customer Due Diligence (CDD) is the comprehensive act of performing background verification & screening customers to ensure that they are thoroughly risk-assessed before bringing them on board the business.

Banks, non-banking financial institutions, as well as financial service providers are obligated to conduct these due diligence procedures for their customers to assess & understand the money laundering risks that they may face.

 

Customer Due Diligence assists businesses in mitigating financial crime. Know-Your-Customer & Anti-Money Laundering initiatives rely primarily on CDD as it helps prevent financial fraud like money laundering & terrorist financing.

Why Is Customer Due Diligence (CDD) Necessary? 

Banks & financial institutions across the globe are emphasizing AML compliance as a strong preventive measure that can help combat the grave threat of money laundering. Without an effective CDD procedure, businesses not only expose themselves to fraud but also a range of other issues, including AML non-compliance fines.

Some of the reasons why Customer Due Diligence is critical for financial institutions are:

  • Risk Identification: CDD helps financial institutions identify unusual transactions from their customers in order to protect themselves from being exposed to fraud.
  • Threat Mitigation: To stay under the radar, criminals are employing more sophisticated methods & are doing so, especially in the form of cyber threats. This necessitates financial institutions to establish a meticulous system to mitigate these threats. 
  • Non-compliance Penalties: Regulators can levy big compliance fines when organizations do not comply with anti-money laundering guidelines. CDD helps FIs comply with all the existing AML regulations & laws. 
  • Reputation Damage: Incidents of anti-money laundering jeopardize a financial institution’s reputation. 
  • Prevention of malpractices: FIs need to follow CDD practices to safeguard the firm from malpractices like identity theft to prevent the business’s misrepresentation. 

What Does a Typical Customer Due Diligence (CDD) Procedure Look Like?

There are certain requirements that businesses need to provide so as to facilitate a smooth & effective customer due diligence process. CDD requirements need FIs to collect the following information prior to onboarding them:

  • Customer Information (For Individuals): FIs need to ensure that their customers are who they say they are. For this purpose, they collect customer information like the full name, address, email ID, occupation, mobile number, PAN, etc. 
  • Client Information (For Business Entities): For CDD measures, FIs need to gather information about the customer’s fund source(s), business model, & Beneficial Ownership (BO). 
  • Background Investigation: Certain screening procedures like PEP screening, adverse media screening, sanction list screening, watchlist screening, etc., to check whether the customer has/is involved in AML activities. 
  • Customer Risk Estimation: Depending on factors such as the customer/client’s identity, business type & address, customers/clients are classified into different risk levels. These categories usually include low, medium, & high risk & the level of due diligence is determined based on the risk category. 
  • Continuous Monitoring: Customer due diligence measures have to also include a system for ongoing customer monitoring to keep tabs on customer activities & identify suspicious transactions. 

Customer Due Diligence Requirements- The CDD Checklist

Customer Due Diligence procedures require certain elements in order to verify the potential customer before bringing them on board the business. The requirements depend on whether the customer is a business entity or an individual.

  • For Individuals:
    • Full name
    • Government ID documents like PAN Card, Aadhaar, etc
    • Address
  • For Companies:
    • Registered company name
    • Principal operating location
    • Company registration number
    • Contact details (number, email, etc.)
    • Addresses of the registered offices & head offices

FIs are required to collect the aforementioned data to carry out customer due diligence. A typical Client Due Diligence process flow takes place as follows:

  • Data Input: The applicant (individual/business) provides identity details such as name, address, etc., through an online form. 
  • Video Call: The applicant gets on a video call to initiate KYC verification.
  • Image Capture: The applicant’s real-time photo & pictures of the applicant’s ID documents are captured.
  • Database Match: The captured images are checked against databases to verify the individual’s authenticity. 
  • Backdrop Checks: During KYC, several checks are conducted to identify fraud signals, including the IP address, location, liveness, etc.
  • AML Screening: As part of AML compliance, the applicant is screened against watchlists, sanction lists, PEP lists, etc.
  • Risk Level Assignment: The applicant is assigned to risk pools based on the checks, screening, and fraud signals.
  • Onboarding: Financial Institutions onboard the individual/business into their organization.
  • Ongoing Monitoring: Clients are monitored through AML monitoring, behavioral monitoring & transaction monitoring on a continuous basis.

Risk Evaluation & Customer Due Diligence (CDD) Allocation

Due to the large number of customers & the significant differences in the extent of the risk posed by them, FIs have to determine the extent of due diligence & the type of mitigation that is required.

Financial Institutions are required to assess their customers’ risk profiles & classify them as high risk or low risk. The customer’s identity, financial status, social status, nature of the business activity, and information about the client’s business and location, among other factors, are used to categorize risks.

Based on the type of business transaction & the level of risk estimated, there are two levels of customer due diligence:

Simplified Due Diligence- For Low-Risk Customers

FIs have to conduct money laundering & terrorist financing risk evaluation to identify, analyze, document, and take appropriate measures to mitigate ML and TF risks. However, financial institutions do not always require that every consumer goes through the entire verification process. SDD or Simplified Due Diligence is the choice of solution for low-risk customers.

SDD does not nullify any of the necessary CDD steps but allows FIs to shorten the verification process in terms of time and scope.

Enhanced Due Diligence- For High-Risk Customers

A high-risk situation is one in which there is an increased possibility of money laundering or terrorist financing through the FI’s service or product. When a customer is perceived to be a higher risk to the company, Enhanced Due Diligence, or EDD, is required.

Customers that pose a higher risk of money laundering are subjected to Enhanced Due Diligence or EDD. Some of the cases that require EDD include customers from high-risk countries, Politically Exposed Persons (PEPs), & large transaction amounts.

The Role Of KYC In Customer Due Diligence

Know Your Customer or KYC procedures are  critical  in evaluating consumer risk & a legal requirement in order to comply with Anti-Money Laundering (AML) laws.

To successfully mitigate the risk of money laundering, financial institutions must implement a robust AML compliance program. The process is further strengthened when they perform KYC during the customer onboarding process & throughout the customer lifecycle.

KYC prevents FIs from being used for criminal activities like money laundering. In addition,  It enables These institutions to better understand their customers and their financial transactions in order to serve them and manage risks more effectively.

How Can FIs Enhance Customer Due Diligence? – Digital KYC Is The Answer

Digital KYC is an advanced solution to enhancing Customer Due Diligence procedures. Financial Institutions can leverage automated digital KYC platforms like SignDesk to speed up their CDD processes.

Digital KYC brings efficiency to the CDD process flow by offering a smart, automated & remote verification solution banks & other financial institutions can benefit from. It verifies customers online & reduces CDD turnaround time significantly.

Digital KYC uses these steps to conduct customer verification in real-time:

  1. Invite: The customer is sent a KYC invite over email
  2. Accept: The customer accepts the invite & longs into the digital KYC portal
  3. Video Call: The customer uploads digital documents & initiates video KYC
  4. Image Capture: Live images of the ID documents & the customer are captured
  5. Matching: The images are matched against databases
  6. Verification Complete: The customer is verified & accepted/rejected based on the nature of the verification results

Boost Customer Due Diligence With SignDesk’s Digital KYC 

Customer Due Diligence is an important part of financial institutions’ compliance with CDD AML laws. It is critical to verify  customers’ identities & assess the risk they may pose to the business before onboarding & during the entire customer lifecycle.

When FIs want to onboard customers at a large scale, digital KYC is the best solution to go for. Digital KYC cuts customer verification & onboarding time to a few minutes and increases conversion rates without the need for additional employees to manage the CDD process.

SignDesk’s automated digital KYC platform enables FIs to create a smoother & seamless CDD process. It offers finance businesses a more accurate & consistent method of performing CDD that eliminates human error & creates better customer experiences. Furthermore, automation accelerates processes, increases efficiency, and helps financial institutions scale effortlessly.

Get in touch with our experts to know how you can strengthen your Customer Due Diligence processes with Digital KYC.