What is customer due diligence in banking - a detailed insight
The simplest method to describe Customer Due Diligence (CDD) is that it’s the regulatory obligation of banks and other financial institutions. It is often considered as it is the obligation of the banks only but that is not the case. It’s because the banks were the very first entities who were obliged to perform customer due diligence when the laws first came into being. Let’s have a detailed insight into customer due diligence.
Definition
Customer due diligence for banks is the act of collecting and verifying the personally identifiable information to maintain an understanding of the risk associated with the customer and to verify that the customer is who he claims to be. Customer due diligence is a part of a bigger thing called “Know Your Customer” or simply KYC. CDD is the first step of KYC compliance.
Banks perform customer due diligence on their customers by collecting their personal information and then verify that information through legal identity documents of the customers.
Customer due diligence is a multilayered process but not every customer goes through every layer of this process. CDD includes basic CDD, Enhanced Due Diligence (EDD), and ongoing screening.
Basic Customer Due Diligence
It is the first step of CDD, and in this process, basic information about a customer is extracted and verified. In this step the bank is able to identify the risk associated with a certain client. In this step the basic information collected and verified is:
Name
Age
ID card number
Address
Gender
Marital status
Nationality
Biometric authentications (fingerprint or face verification)
Once this is completed the person is identified and the record is stored in for future verifications. Such as when the customer accesses his/her account, makes payments, or does online transactions. Basic CDD is mostly conducted to collect useful information about a customer.
Enhanced Due Diligence (EDD)
EDD is conducted on the customers identified as high-risk entities in the basic CDD process. These customers are found connected to some high-risk entity, belong to a country that is a high-risk region or is a PEP (Politically Exposed Person).
It is performed to gain more information about the customer. The reason for EDD is to get detailed insight into the customer background that would help the bank to decide the risk rating of the customer.
EDD includes collecting income-related information of the customer, such as annual income, source of income, etc. Also, AML (Anti Money Laundering Check) screening is performed to know if the customer is listed on some blacklist. It helps the banks to decide if it would serve the concerned customer or not.
Ongoing screening
This is the final step of CDD and as the name shows it is an ongoing process. The banks perform screening on their customers off and on to stay updated regarding the risk update about a customer. The interval of ongoing screening is decided as per the risk rating of a customer. High-risk customers are verified as screened frequently, and low-risk customers are screened less frequently.
To wrap up, CDD is the mandatory part of customer journey in every bank. Sometimes the banks perform this manually, but slowly they’re moving towards automated outsourced KYC/AML screening solutions that can perform verification on a person within seconds.
Based on artificial intelligence these solutions perform verifications in real-time and helps reduces the compliance burden of the banks. Now that the global authorities such as FATF are accepting these reattach solutions, the banks are thinking about using these solutions more frequently.
As it is a win-win situation for all, these fast solutions deliver global coverage and high accuracy so banks need not worry about false positives and identity verification will grow faster when banks will completely adopt these solutions.