The revolution in financial technologies has led to the introduction of numerous innovative solutions. Manual procedures are now getting replaced entirely by digitally optimized mechanisms. For this reason, the finance sector is readily adopting high-tech solutions that yield efficient results. Financial institutions such as cryptocurrency exchanges and banks now use online means to perform their customer onboarding process. They have widely transitioned to automated technologies for know-your-customer procedures. KYC verifies customer identities during the onboarding process. Customer due diligence is critical to a seamless KYC process.
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Introduction to the Know-Your-Customer Due Diligence Procedure
Customer due diligence is a vital step of the know-your-customer procedure. It is immensely critical in achieving KYC compliance. The process of know-your-customer due diligence involves gathering information about customers and clients to verify their identity. It is a mandatory process to identify and detect illicit financial activities such as money laundering, terrorist financing, and crimes like corruption. Various sectors, including e-commerce, insurance, real estate, finance, healthcare, travel, and legal, perform due diligence on their customers. The organizations ensure that their customers are legitimate entities having legal identities. Therefore, customer due diligence enables them to comply with anti-money laundering and terrorism financing regulatory standards.
KYC versus CDD (Customer Due Diligence)
Know-your-customer and CDD (customer due diligence) go hand in hand and are used interchangeably. However, both differ slightly. KYC involves the collection of customer data to verify their identity. Financial and non-financial organizations require customers’ government-issued identity documents to onboard them. It is typically restricted to customer onboarding, whereas CDD is a constant process throughout the client-firm relationship. It occurs at regular intervals to monitor the custom activities. In financial organizations such as banks, insurance companies, cryptocurrency exchanges, and digital asset firms, CDD is performed to monitor the customer’s financial activities. It detects anomalies that might disrupt their secure environment, such as suspicious transactions. Customer due diligence evaluates the risk potential a client may pose.
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Customer Due Diligence Process
The customer due diligence process in every financial and non-financial firm typically comprises the collection of various customer credentials, as enlisted below:
- Client’s name
- Present residential address
- Date of birth
- Government-issued identity documents, such as national identity cards, social security numbers, passports and driver’s license
Companies can often demand additional personal information, including marital status and occupation, to carry out an in-depth identity verification. Moreover, if the client is a business corporation, the nature of the identity verification criteria during customer due diligence alters. The information collected by them is stated below:
- Name of corporation
- Type
- Date of establishment
- Address
- Ultimate Beneficial Owners (UBOs) or the individuals that directly benefit from the company
- Specific details about the senior management and the corporation’s stakeholders
Customer Due Diligence Checks
According to United Nations Office on Drugs and Crime, about 800 billion to 2 trillion US dollars are estimated to be laundered in one year. Thus, financial institutions, specifically banks, perform customer due diligence checks by screening clients’ names against several watchlists to mitigate money laundering risks. They include various grey and black lists, databases, and records of sanctioned individuals, companies, or states. Furthermore, clients are verified according to lists containing politically exposed persons (PEPs), terrorist or criminal networks, and adverse media reports. Adverse media refers to the negative information or news that can expose an individual or company’s link to financial crimes such as terror financing, money laundering, and fraud. These checks lead to efficient compliance with anti-money laundering and terrorist financing laws established by Financial Action Task Force and other global regulatory bodies.
Ongoing Monitoring of Customer Profiles & Enhanced Due Diligence
Ongoing monitoring is another significant dimension of customer due diligence. As mentioned, it is defined as continuously monitoring or screening customers’ activities. A financial organization, for instance, a bank, detects any illicit financial activity or red flags through customers’ ongoing or perpetual monitoring. It assesses the risk factor associated with the customer and assigns a risk score accordingly. The bank then performs an advanced version of EDD compliance, known as enhanced due diligence or EDD. This process enables it to conduct vigilant and strict surveillance of high-risk clients, which may include an individual or a business corporation. If a suspicious activity is detected, the bank generates a suspicious activity report (SAR) and reports it to relevant authorities for further investigation.
Customer Due Diligence Solutions
There are various software as a service (SaaS) providing companies that offer high-tech and state-of-the-art software solutions. Such technologies utilize artificial intelligence tools to streamline a company’s operations. They also enhance the customer onboarding process of financial and non-financial institutions. Banks seek their services to modernize their KYC procedures, switching from manual methods. Customer due diligence solutions ensure that banks stay compliant with AML/CFT benchmarks. Such top-notch customer due diligence solutions also assure a secure environment as they efficiently identify any suspicious activity that might harm the organization. Therefore, banks and other financial sector firms must resort to AI-backed solutions that streamline their KYC and customer due diligence procedures. In short, due diligence is highly efficient for financial institutions because it allows them to identify suspicious customers and ensures AML/CFT compliance.
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