The 2007 Regulations mandate Customer Due Diligence (CDD) as it permits businesses to recognise suspicious transactions by understanding clients and their instructions.
Anti-money laundering requirements highlight the importance of CDD measures, enabling companies to understand their customers deeply. Not only this, but it also avoids accepting customers beyond their risk tolerance and recognises any unusual activities or patterns. A lack of understanding of a customer’s typical business pattern makes it challenging for organisations to detect any abnormal activity.
Several businesses have their own customer acceptance processes to comply with professional independence regulations and discourage conflicts. The conventional CDD is not only beneficial for accepting decisions but also helps the companies develop informed assumptions about customers’ conduct. It also helps in identifying any potentially doubtful behaviours during business relationships.
Deep Dive in Customer Due Diligence (CDD)
During onboarding, companies undertake Customer Due Diligence (CDD), which involves accumulating and authenticating a client’s personal information such as name and address.
Moreover, the procedure of CDD involves verifying the client’s identity and assessing the risks linked with engaging in business with them. It also aims to stop financial crimes, including money laundering and identity theft.
For example, a trading platform or a bank requires investigating a customer’s passport before permitting them to make an account.
Significance of CDD
Undertaking customer Due Diligence is a critical step that companies should take to ensure the identity of their clients, on top of that, it prevents fraudulent activities such as terrorist financing, money laundering and other criminal activities. Noncompliance with Anti-Money Laundering (AML) regulations also leads to severe reputational and financial consequences for businesses.
In jurisdictions like Cyprus, where financial sectors are non-compliant with AML regulations and tightly regulated results in substantial legal penalties and fines. The detailed amount of the fine can vary depending on the size of the business and the severity of the violation. However, it’s not unusual for fines to surpass one million euros in such cases.
Companies that fail to comply with AML regulations not only incur financial penalties but also suffer reputational harm. The significance of such damage includes challenges in customer acquisition and a decline in customer confidence. It also has an adverse effect on the overall business productivity.
Therefore, businesses must comply with AML regulations and undertake CDD measures to alleviate the risk of fraud. It includes transaction monitoring , and reporting suspicious activities to the relevant authorities.
CDD Variants: Enhanced and Simplified Due Diligence
In circumstances where the risk of money laundering is considered to be low, specific regulatory bodies allow a simplified form of verification. However, for higher-risk scenarios, companies may be needed to conduct a more comprehensive assessment known as Enhanced Due Diligence (EDD).
- Simplified Due Diligence
Financial regulators may not always require a complete verification process for every client. SDD is an effective solution for low-risk clients, involving individuals with reliable sources of income and public companies.
Despite allowing companies to streamline the verification procedure, SDD doesn’t eradicate any critical steps. For instance, it can be used for transactions of up to 100$, whereas if they pass this limit, the full process must be conducted again. Yet, SDD isn’t suitable for certain industries, geographic regions and products.
- Enhanced Due Diligence
Numerous suspicious cases pose a greater money laundering risk and need Enhanced Due Diligence(EDD). These cases involve clients from high-risk countries, cross-border correspondent relationships with third-party counties, and politically exposed persons(PEPs).
EDD and CDD differ in the level of scrutiny applied by companies. EDD includes additional assessments ranging from data to verifying sources of funds and wealth. It may also require senior management approval before establishing a business relationship.
Customer Due Diligence Mandates
The information required for collection depends on whether the client is an individual or a company.
The particulars for verifying individuals may vary depending on the jurisdiction, including a standard set of formats, i.e.,
- Full name
- Residential address
- Government-issued identification and tax number
To assure customer identity, businesses can consult a reliable or independent document that portrays the client’s picture such as a passport or an ID card. Companies can utilise six months old utility bills, municipal taxes, bank account statements, and housing insurance documents to verify a client’s residential address.
Automated verification is highly recommended if a company is onboarding clients remotely. This approach reduces onboarding time to improve conversion rates, without requiring additional employees to manage the process.
CDD is an essential procedure for companies to verify and understand their clients. It helps to discourage fraud activities such as terrorist financing, and money laundering or ensures compliance with AML regulations. It involves managing or authenticating personal information and assessing the risk linked with engaging in the companies with the customers.
SDD and EDD are variants of CDD used for high and low-risk scenarios respectively. Noncompliance with AML results in severe reputational and financial outcomes for businesses, making it imperative to comply with regulations and undertake CDD measures.
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