What role does Customer Due Diligence services play for FinServ?

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Customer Due Diligence services

Almost every individual practices due diligence in real life without even realising it. All of us perform some kind of research before buying anything, right? All companies check their candidates’ background and capabilities before employing them. Similarly, companies belonging to the financial services (FinServ) sector perform due diligence for prospective customers before opening their accounts or offering them a service. Customer Due Diligence (CDD) services play an important role here. 

Understanding CDD

Whenever a customer applies for an account or another service from a bank or financial institution, the company conducts CDD to identify the customer and verify the information provided. Due diligence is crucial to ensure proper risk assessment before onboarding a customer. Practically, it means gathering a customer’s details and verifying them with official documents to confirm their identity. CDD is an inseparable component of KYC and AML initiatives as it helps financial institutions and banks verify their clients and ensure they are not high-risk candidates on prohibited lists. 

Three levels of CDD

  1. Simplified: Simplified due diligence is applicable in situations when the risk of terrorist funding and money laundering is low. For instance, low-value transactions have the slightest opportunity for illegal activities and do not require stringent CDD measures.
  2. Standard: In this process, the institution obtains information from prospective clients to check their identity and assess the associated risks. These checks mostly happen when a customer applies to open a new account with the FinServ firm.
  3. Enhanced: Enhanced due diligence is necessary to gather intricate details about high-risk customers and mitigate financial risks. For instance, banks conduct EDD for politically exposed persons (PEPs) when they conduct high-value transactions with people in high-risk countries.

Importance of CDD Services

CDD helps FinServ companies comply with the regulations and avoid sanctions and hefty fines. Besides that, knowing customers and gathering their details help them survive in the financial sector. Here are a few reasons why a financial institution must take CDD seriously:

  • Saves hefty compliance fines: Regulations related to anti-money laundering activities are getting increasingly stricter. Regulators impose hefty compliance fines if the financial institution does not follow the CDD procedures efficiently. Therefore, performing CDD saves a financial company from paying hefty compliance fines.
  • Shields against serious cyber threats: Criminals continuously find new ways to commit financial crimes, while staying undetected. These include the dark web, insider information, e-commerce schemes and globally coordinated technological advancements.
  • Protects reputation: AML incidents conducted at a financial institution put its reputation at risk, leading to loss of trust among customers. Conducting due diligence before onboarding clients and monitoring their transactions on an ongoing basis prevent financial fraud and help build trust among customers.
  • Enhanced customer experience: CDD services have several touch points with customers to gather and verify their information. Prolonging the onboarding process by just a few minutes can significantly increase the drop-off rate. Therefore, hiring technologically advanced professionals for CDD saves customers’ time and streamlines the process to give them a better experience.

According to international standards, a financial institution must follow a risk-based approach to conduct customer due diligence. It must assess terrorist financing and money laundering risks with each client and adjust its scrutiny accordingly. Where the risk is higher, the bank should apply enhanced due diligence (EDD) to mitigate the risks. CDD is required whenever a customer enters into relationship with a business. It becomes a necessity under the following circumstances:

  • A FinServ provider must perform CDD before onboarding a customer to check identity and assess risk profile.
  • CDD measures are applicable whenever an occasional transaction involves a substantial amount of money or when a high-risk country is involved.
  • If the company suspects terror funding or money laundering by a customer, it must implement a robust CDD check.
  • When a customer provides inadequate or unreliable identification documents, it must apply stricter CDD scrutiny.

Hiring a company providing CDD services is crucial to fulfilling all the above requirements. The CDD service provider will help onboard the customers quickly and efficiently with accurate results. Choose secure and scaleable solutions for simple integration and robust identity verification systems.

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