When it comes to financial institutions, one of the most important things to consider is Customer Due Diligence (CDD). The process helps to ensure that the customer is who they say they are and that they are not involved in any illicit activity. It aims to verify a customer’s identity and assess their potential risk to a company. Financial institutions typically use this process when opening new accounts, but they are also applicable to other types of businesses. All in all, it is an integral part of risk management and helps financial institutions comply with anti-money laundering (AML) regulations.
Several specialists provide customer due diligence services to assess potential customers or business partners and determine if they pose a risk to an organization. These services aim to gather enough information about the customers and make informed decisions about whether to enter into a business relationship with them. Let’s explore the methods and types of CDD relevant today.
Types of Customer Due Diligence
There are also a few different types of customer due diligence services, including the following:
- Standard CDD: Standard CDD is the most basic level of CDD and is typically used for low-risk customers.
- Enhanced CDD: Enhanced CDD is used for higher-risk customers and involves more extensive due diligence.
- Simplified CDD: Simplified CDD is used for very low-risk customers and involves a simplified version of the CDD process.
No matter which type of CDD is in place, the goal is always the same. It ensures that the financial institution is providing services to legitimate customers and not putting itself at risk of being used for illicit purposes.
Methods Used for CDD Services
There are a few different CDD methods that banks and financial institutions use on an everyday basis. The most common ones are:
- KYC (Know Your Customer) Checks: This method assesses the risks associated with a customer and ensures they are who they say they are.
- AML (Anti Money Laundering) Checks: They are common as they help assess the risks associated with a customer’s financial activities.
- Credit Checks: These assess the risks associated with a customer’s ability to repay loans or debts.
- Background Checks: These look into a customer’s criminal history and other factors that may pose a risk.
- Document Verification: The method involves verifying the customer’s identity documents, such as their passport or driver’s license.
- Identity Verification: The method goes a step further and involves verifying the customer’s identity through external sources, such as credit agencies.
- Risk Assessment: A more holistic approach looks at the customer’s overall risk profile, considering factors such as their financial history and any previous brushes with the law.
These are just a few methods used for customer due diligence. Banks and financial institutions usually use a combination of these methods to assess the risks associated with a customer. Organizations should perform customer due diligence services on all new customers and business partners and periodically review existing relationships to ensure that their CDD procedures are up to date.