Customer due diligence (CDD), or know your customer (KYC), is the process of a business identifying and verifying the identity of its clients. The term is also used to refer to the bank and anti-money laundering regulations which governs these activities. This process is also employed by companies of all sizes for the purpose of ensuring their proposed agents, consultants, or distributors are anti-bribery compliant. Banks, insurers and export creditors are increasingly demanding that customers provide detailed anti-corruption due diligence information.
Types of CDD
1. Simplified Customer Due Diligence (SCDD)
A designated person does not have to identify information on the purpose or intended nature of the business relationship of a customer, or the beneficial owner of a customer, where the customer is considered to present a low risk of money laundering or terrorist financing. However, the designated person must obtain sufficient information about the customer to satisfy itself that the customer meets the criteria for SCDD to be applied to it.
2. Enhanced Customer Due Diligence (ECDD)
In situations that present a higher risk of money-laundering or terrorist financing, designated persons are obliged to undertake CDD measures above and beyond normal measures, i.e. Enhanced Customer Due Diligence.
The extent of additional information sought, and of any monitoring carried out in respect of any particular customer, will depend on the money laundering or terrorist financing risk that the customer is assessed to present to the designated person.
Why to Conduct Customer Due Diligence
CDD is a fundamental rule of business and basically comes down to knowing who you are dealing with. For any financial institution, one of the first analysis made is to determine if you can trust a potential client. You need to make sure any potential customer is worthy. Customer due diligence is a critical element of effectively managing your risks and protecting yourself against potential financial crimes and nefarious activities.
Where there’s money, there are also criminals lurking to take advantage wherever they can. Besides being the right thing to do morally, the customer due diligence process is a smart business strategy to avoid heavy losses due to fraud, hefty fines and sanctions, as well as bad publicity. Not knowing your customer in today’s financial World is a non-starter.
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