Customer due diligence in 3 simple steps
Customer due diligence in 3 simple steps
24 MAY 2023
Customer due diligence (CDD) is a mandatory component of AML/CFT compliance. You are expected to know your customers, assess their risk level and identify suspicious activity. There are many reasons why CDD is important, but if you were to list them in terms of significance to your business, then we reckon you would put ‘reputation’ at the top. If it becomes known that you did not take the appropriate steps to prevent money laundering or terrorist financing, it can damage your reputation and encourage your clients to go elsewhere.
It is helpful to think of CDD as your first line of defence when it comes to detecting and preventing financial crime. To keep it simple we break CDD down into three simple steps that if correctly followed, will massively decrease the risk of criminal activity in your business and avoid the serious consequences such incidents would bring about.
Step #1: Understand your customers
CDD enables reporting entities to gather comprehensive information about their customers, including their identity, business operations, and sources of funds. By conducting thorough customer identification and verification procedures, you can establish a baseline for your customer, enabling you to identify any deviations or suspicious activities. This information will help you build a profile of each of your customers, which will serve as a reference point for future transactions and interactions.
Step #2: Assess risk
CDD plays a crucial role in assessing the risk associated with a customer or business relationship. Reporting entities are required to assign risk ratings to customers based on factors such as their geographic location, industry, transaction patterns, and reputation. High-risk customers, such as trusts, politically exposed persons (PEPs) or those operating in high-risk jurisdictions, require enhanced due diligence measures. CDD helps institutions identify potential vulnerabilities and implement appropriate risk mitigation strategies.
Step #3: Detect suspicious activities
CDD acts as a foundation for detecting suspicious activities that may indicate money laundering or terrorist financing. By establishing a clear understanding of a customer's expected transaction patterns and behaviour, financial institutions can identify transactions that deviate from the norm. Unusual or complex transactions, frequent cash deposits or withdrawals, and structuring of transactions to avoid reporting thresholds are some examples of red flags that can be identified through robust CDD procedures. Early detection of suspicious activities allows institutions to report them to the relevant authorities, contributing to the overall fight against financial crime.
For more information or if you need assistance with your CDD policies and processes
get in touch with our team – we’re here to help.