Customer Due Diligence (CDD) and Know Your Customer (KYC) are often used interchangeably by regulators and financial institutions, but these two aren’t exactly the same process—at least, not everywhere. The meaning and level of these terms can change depending on where they are used, and some regulators prefer using one term over the other.
However, both Customer Due Diligence and Know Your Customer are important components of anti-money laundering (AML) programs. They also have one goal, which is to ascertain that the customer whom the financial organization is dealing with is who they say they are. AML programs must also determine that the customer is not acting as a front for money laundering and terrorist financing activities or entities that perpetrate these financial crimes.
CDD refers to the process of collecting and evaluating information about a particular customer, allowing the organization that is doing the assessment to see if the said customer makes them vulnerable to certain risks. This process is done for many reasons, the most important of which include the following:
- To follow legislation and regulations
- To ensure that the customers are who they say they are
- To check if they are not breaking any law by providing the customer what they need
- To protect the firm against fraud and other forms of financial crimes
- To collect information that will help in identifying usual or unusual transactions or activities
- In the case of unusual transactions, to ensure that the activity is not a part of financial crimes
- To assist regulatory and law enforcement agencies should they need additional information about a certain client
From a business risk management perspective, conducting CDD is an essential step in making sure that the firm is not exposed to considerable risks. Failing to do proper CDD is a costly mistake. In the past 10 years alone, regulatory bodies have sanctioned various global financial institutions with fines amounting to USD 26 billion due to failure to comply with AML and KYC regulations. In addition, getting involved in a financial crime can damage a firm’s reputation, both in the financial industry and outside of it.
To prevent losses, many financial institutions are now keen on signing up for products that will aid their compliance team and ensure that they are carrying out enhanced due diligence programs. This is a sound investment, given that Customer Due Diligence solutions often offer users these advantages:
Improve the Company’s Risk Assessment Capabilities
With a dependable CDD program at their disposal, the firm will be able to cut down the time they need to calculate the risks that come with onboarding a new client. Oracle’s seamless Customer Due Diligence solution, for example, makes use of algorithmic scoring models with more than 450 standard match rules. The entity the firm is investigating is screened for sanctions and other sources of risk, all while reducing the chances that the search results will come up with false positives. At the same time, the firm can also fine-tune the results depending on how much risk they are willing to take on.
Another advantage of having a Customer Due Diligence solution is getting access to sophisticated visualization tools. Aided by analytical graphs and other visual tools, a firm can choose to deepen their investigations. After a thorough review, they can make confident decisions about their customers and rest easy knowing it’s unlikely that they’ll incur sanctions from regulatory bodies.
Manage Customers Better
Collecting and compiling information about customers is a resource- and time-intensive task. It requires the firm to get in touch with multiple sources and wait until the sources get back to them with the information that they need. There’s little to no need for waiting if the company is using a CDD solution that allows seamless integrations with third-party sources. As soon as the information is collected, the firm can automatically initiate the screening process. Once the screening is done, the firm can get an unobstructed view of the risk associated with each customer. This enhanced process, in turn, allows the firm to onboard the client or put them on hold ASAP.
Provide Better Customer Experience
Finally, using CDD solutions will also benefit the customers that the firm is dealing with. They’ll be able to enjoy a streamlined onboarding process, for example. Also, the firm can choose to de-risk low-risk customers. This step allows the firm to focus on more high-risk customers and offers low-risk customers uninterrupted use of the firm’s services and products.
Customer Due Diligence is done whenever the firm is establishing a new business relationship or when carrying out occasional transactions involving parties in high-risk areas or amounts of money beyond a certain limit. It’s also appropriate to carry out CDD if a customer is suspected to be involved in financial crimes or if the documents they submitted failed to adhere to the standards accepted by the firm. With the help of a CDD solution, your firm can spend less time and resources on these tasks without increasing its financial or reputational risks or sacrificing customer experience.