What is the Customer Due Diligence?
Jul 2, 2024
Financial fraud is on the rise, with more than 5.7 million complaints registered in 2021, according to the "Insurance Information Institute." Nearly 30% of these complaints involved the fraudulent opening of new credit card accounts. This alarming trend underscores the importance of Customer Due Diligence (CDD) for organizations, especially in the financial sector. Customer Due Diligence is an essential process for verifying customer identities and assessing associated risks, crucial for combating threats like money laundering, terrorism financing, and other illicit activities.
What is Customer Due Diligence?
Customer Due Diligence is a set of procedures that enable financial institutions and other organizations to collect and verify information about their customers. This includes background checks and other controls to assess each customer's risk profile. As mandated by the Financial Action Task Force (FATF) guidelines, Customer Due Diligence aims to prevent financial crime by identifying and mitigating risks of fraud, money laundering, and terrorism financing.
There are several levels of Customer Due Diligence that depend on various factors, such as the type of customer, the nature of transactions, the country risk level, and specific regulatory requirements.
Standard Customer Due Diligence
"Standard" Customer Due Diligence is the basic level of diligence applicable to low-risk customers. It involves collecting and verifying the following information:
Customer identification: Full name, date of birth, address, nationality, identification number.
Document verification: Authenticity verification of identity documents and other provided documents.
Understanding customer activities: Nature of business activities, source of funds, planned transactions.
Risk assessment: Analyzing gathered information to determine the customer's risk level.
Simplified Customer Due Diligence
"Simplified" Customer Due Diligence is a less rigorous customer verification level than standard CDD. It applies to certain types of customers considered to have a low risk of illegal activities, such as individuals making low-value transactions or customers with a long-standing, transparent relationship with the institution. Simplified Customer Due Diligence differs from standard CDD by its less stringent requirements. Simplified Customer Due Diligence plays an important role in optimizing financial institutions' KYC processes. It enables:
Reducing onboarding costs and time for low-risk customers.
Allocating Customer Due Diligence resources more efficiently.
Improving the customer experience for low-risk clients.
Enhanced Customer Due Diligence:
"Enhanced" Customer Due Diligence is applied to higher-risk customers, such as politically exposed persons, clients involved in high-risk cross-border transactions, or clients linked to suspicious activities. It involves more rigorous measures, such as:
Thorough identity verification through multiple sources and additional documents.
Verification of funding sources with detailed scrutiny of the client's source of funds.
In-depth risk assessment with a comprehensive analysis of the client's activities, business relationships, and background.
Continuous monitoring of transactions to detect any suspicious activity.
Why is Customer Due Diligence Important?
Customer Due Diligence is important for several reasons:
Preventing fraud and money laundering: Criminals often attempt to use financial services to launder money from illegal activities. Customer Due Diligence enables financial institutions to identify high-risk customers and take measures to prevent these activities.
Protecting the company's reputation: Being involved in money laundering or terrorism financing activities can severely damage a company's reputation. Customer Due Diligence allows financial institutions to demonstrate their commitment to combating these crimes and maintain the trust of their clients and partners.
Regulatory compliance: Anti-money laundering (AML) and counter-terrorism financing (CTF) regulations require financial institutions to implement Customer Due Diligence procedures. Non-compliance with these regulations can result in significant fines and criminal penalties. According to a Fenergo study, fines for CDD non-compliance reached $6.6 billion in 2023, an increase of nearly 57%.
How Facial Biometrics Streamlines Customer Due Diligence
Customer Due Diligence is a crucial process for financial institutions and companies aiming to fight money laundering and terrorism financing. Traditionally, it relies on physical documents and manual procedures, which can be tedious, error-prone, and time-consuming.
The advent of facial biometrics is revolutionizing CDD by offering a simple, effective, and secure solution for remote identity verification. Facial biometrics not only compares an individual's face with the photo on their ID but also ensures that it's not a fraudster impersonating someone else through liveness detection. You can learn about different types of identity fraud in this article. Using facial biometrics in Customer Due Diligence offers many advantages:
Streamlined processes: Facial biometrics eliminates the need to collect and verify physical documents.
Improved customer experience: Identity verification through facial biometrics is fast, intuitive, and non-intrusive, providing a smoother and more pleasant customer experience.
Error reduction: Facial biometrics is much more accurate than manual document verification, minimizing identification errors and fraud risks.
Enhanced security: Facial biometrics adds an extra layer of security by making identity fraud more difficult.
Regulatory compliance: Facial biometrics complies with anti-money laundering and terrorism financing regulations, which require financial institutions to verify their clients' identities.
Conclusion
Customer Due Diligence is an essential component of financial risk management. By integrating remote identity verification solutions using facial biometrics into the CDD process, financial institutions can improve efficiency, reduce fraud risks, and ensure strict regulatory compliance. Adopting a robust and automated Customer Due Diligence process is not only a legal requirement but also an effective strategy to secure financial operations and strengthen customer trust. Find out the ultimate criteria for choosing your facial biometrics solution in this article.