How Does Customer Due Diligence (CDD) Strengthen AML Compliance?

Customer Due Diligence (CDD) in AML is considered to be the cornerstone of Anti-Money Laundering (AML) compliance in the powerful world of financial crime. It is widely recognized that businesses can protect themselves from cyber attacks by carefully screening their clients. Process of CDD can be ensured if companies stay inside the bounds of international regulatory frameworks for everything from onboarding new clients to tracking ongoing transactions.

What is a CDD in AML?

The process of determining and confirming a customer’s identification is considered to be  the fundamental component of customer due diligence in AML. In order to stop financial crimes like money laundering and terrorism financing, this step is super important. CDD is the process which enables institutions to make sure they meet regulatory requirements through understanding the nature of their clients activities .

Key objectives of CDD:

• Verification of the customer’s identity.
• Evaluation of the customer’s risk profile.
• Recognize the purpose of the business partnership.

When should businesses shift from Customer Due Diligence (CDD) to Enhanced Due Diligence (EDD) in AML processes?

Although CDD is one of the important procedures of AML, features of Enhanced Due Diligence (EDD) may be required in some circumstances. In AML, CDD and EDD work hand in hand as EDD gets applied to transactions or clients that pose a greater risk.

EDD scenarios

• PEPs, or politically exposed persons.
• Unusual transaction patterns. 
• Clients from high risk category

For instance, normal CDD would be carried out by a financial institution at the time of onboarding a multinational firm. However, the organization would escalate the procedure to EDD and conduct a more complete examination of transaction histories if that firm is situated in a nation with lax AML regulation.

What should be included in an AML Due Diligence Checklist to ensure compliance?

Although financial institutions use an AML due diligence checklist to expedite the procedure as the checklist guarantees that no important stage in the client evaluation process is missed. 

Following are the procedures a checklist could contain:

Consumer Identification Program (CIP): this feature uses official documents like passports or government issued identification to confirm the identity of the client.

Verify Beneficial Ownership: this feature determines who owns or controls at least 25% of the company.

Risk assessment:  this feature uses consumer profiles, group clients to rank the risk into categories (low, medium, or high-risk groups) accordingly.

Sanctions screening: This feature involves comparing the client to international watchlists and sanction policies.

Constant Monitoring: This process keeps an eye on consumer transactions to spot any unusual activity.

Real life case study:

Goldman Sachs was subject to severe sanctions  back in 2020 as a result of its role in the 1Malaysia Development Berhad (1MDB) crisis. During the investigation, significance of strict anti-money laundering (AML) due diligence was highlighted as the bank was imposed a penalty of around $2.9 billion by U.S. authorities. This penalty was imposed on the charges of 1MDB involvement in transactions connected to organized crime and corruption. 

How can businesses tailor a Client Due Diligence Checklist to meet their specific needs?

Checklist of due diligence for clients should be tailored according to the needs of various organizations or industries. For instance, a financial institution’s checklist could be different from a real estate company. Although the basic idea could be the same, it is to get to know your customers and keep an eye on their transactions.

Sample of due diligence checklist for clients:

• Gather and confirm client information, such as name, address, and birthdate.
• Determine the source.
• Analyze the type of business partnership.
• In case of any suspicion, do adverse media checks.
• Review and update client data on a regular basis.

Checklist of this nature could be used in practice by a fintech business that offers payment services to reduce the risks involved with online transactions.

How is technology shaping the future of Customer Due Diligence (CDD)?

The future of Customer Due Diligence (CDD) depends on utilizing modern technologies as financial crimes become more complex. The CDD procedures are being revolutionized by the passage of time with automated compliance solutions that are driven by machine learning (ML) and artificial intelligence (AI). Solutions like these can lessen the workload associated with human inspections while increasing accuracy through facilitating quick screening, improved risk assessment, and effective monitoring. 

For instance, artificial intelligence (AI) can easily examine large databases to find trends and indicate questionable activity that human analysts would likely miss. Furthermore, blockchain technology has started to revolutionize safe and open verification procedures. In such a way, financial institutions can remain ahead of changing threats and regulatory requirements by using such technologies.

Strengthen Your AML Strategy  

You can Ensure comprehensive Customer Due Diligence and stay compliant with global AML regulations by incorporating AML Watcher. From real-time sanctions screening to PEP monitoring and ongoing transaction reviews, AML Watcher has got you covered as it offers cutting-edge solutions tailored for your business needs.