Customer Due Diligence for Banks: Process & Types Explained

Customer Due Diligence for Banks
Customer Due Diligence for Banks

Banks and other financial institutions have to take a lot of precautionary measures to fight criminal activities. According to UNODC, two to five percent of the global GDP is laundered every year. Furthermore, a global identity fraud report from Shufti Pro has identified a 3.36% increase in identity fraud. Banks being goldmine for fraudsters become liable to ensure that every account holder or potential customers must be legitimate. Considering the staggering numbers in identity fraud, regulatory authorities and FATF have suggested certain rules and regulations to protect banks from fraudsters. One such law is Customer Due Diligence (CDD) for legitimate customer onboarding.

Eager to know everything about customer due diligence (CDD) and it’s important for banks? Fantastic. Let’s jump right in.

What is Customer Due Diligence?

Customer due diligence is one of the best ways of dealing with fraudsters in the banking and finance sector. Relevant information about the customers is collected and evaluated for potential risks such as money laundering, terror financing groups and stolen identities.

Types of Customer Due Diligence

When you know what’s at stake, understanding the vitality of the process is no longer a hassle. Without customer due diligence, banks and other financial companies may not be able to protect their business from FinCrime. Here are the three types of customer due diligence that every business must know about. Choosing the right type for the right customer will get convenient.

Standard Due Diligence

This type of CDD for banks includes verification of a customer’s identity through simple Know Your Customer (KYC) protocols. The government-issued ID documents are verified for forgery and tampering. Then, face verification checks are performed to detect spoof attacks on time.

Simplified Due Diligence

This type of due diligence in the banking sector is based on a risk-based approach (as suggested by FATF). The type involves low or no risk financial crimes. For instance, customers who belong to high-risk jurisdictions. Through simple identity documents and personally identifiable information (PII) are sufficient for simplified due diligence.

Enhanced Due Diligence

On the other hand, enhanced due diligence (EDD) in the banking and finance sector is performed on high-risk entities. The risk of money laundering, tax evasion, corruption and terror financing are significantly high for these customers. What does high-risk customer mean? Well, any this refers to any individual who resides in a high-risk jurisdiction and such customers can be asked for additional information for identity verification.

Enhanced due diligence from banks can ensure that larger assets, funds or transactions are assessed in order to minimize the risk of crimes, regulatory fines and damaged brand reputation. For EDD, the individual is screened against several watchlists, including Politically Exposed Persons (PEPs), government-issued sanction lists and blacklists.

The Vitality of CDD in the Banking Sector

Customer due diligence is an important part of the identity verification process in the banking and finance sector. CDD allows businesses to enjoy numerous benefits and some of these perks are:

Avoid Non-Compliance Costs

KYC and AML laws across the world are becoming rigid with the passage of time. To comply with these regulations effectively, there is a dire need for a solution that can help companies deter fraud and abide by the laws. Customer due diligence is one effective way of achieving the goal. It can save a lot of non-compliance costs for businesses too.

Detect Sophisticated Cyber Attacks

Identifying cyberattacks can be a problem since businesses have sophisticated criminals to deal with. Technological advancements have not only helped businesses but criminals too. They are also using modern technology to fulfil their illicit goals. Employing customer due diligence can help businesses in that matter and detect fraudsters will no longer be a problem for the corporate world.

Key Takeaways

All in all, customer due diligence is one of the most effective ways of dealing with criminal activities in the banking and finance sector. With the continuous rise in fraudulent activities, businesses can greatly benefit from CDD. It helps in identifying fraudsters and keeps criminal activities at bay. Moreover, it helps in complying with stringent KYC and AML regulations. From fighting fraudsters to ensuring a sound brand image, customer due diligence offers a wide range of advantages that are hard to count on fingertips.


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