Do you know your customers? If you’re a bank or a financial institution, it’s in your best interests to do so. Otherwise, failing to ascertain your customers’ identities and the nature of their financial activities could cause significant harm to your business.
After all, financial criminals are always on the lookout for ways to launder dirty money through legitimate financial markets and banking systems. Because of this, your enterprise could become an unwitting party to money laundering, terrorist financing, and other illicit activities. Worse still, should your financial institution be found to be doing business with malicious actors, it will be subject to hefty fines, sanctions, and irreparable reputational damage.
This is why customer due diligence is indispensable for financial institutions. It’s an essential operational task that helps protect your business from potential fraud and other financial crimes while ensuring compliance with various regulatory bodies. Below, we discuss what makes up an effective customer due diligence solution:
Know Your Customer
Know Your Customer or KYC refers to a set of guidelines that financial institutions must follow. These are meant to establish a customer’s identity, verify the legitimacy of that customer’s source of funds, and assess the money laundering risks associated with them. The following elements are crucial to creating and running an effective Know Your Customer program:
Customer Identification Program
Accurate identification of one’s customers reduces instances of illicit activities such as identity theft and fraud. For banks and other financial institutions, it can also limit money laundering, terrorism funding, and other financial crimes. Financial institutions are therefore required by law to take certain steps to ensure that their clients are who they say they are through a Customer Identification Program.
A good Customer Identification Program entails obtaining basic information from the customer before providing them with access to financial products and services. At a minimum, a bank or financial institution should require customers to provide essential user data such as their full name, residential address, date of birth, and a government-issued identification number. Additional requirements can include the customer’s gender, nationality, marital status, occupation, and specimen signatures.
Customer Due Diligence
Customer Due Diligence entails the assessment of a potential client’s background to confirm that they are trustworthy. These background checks manage your financial institution’s risks and protect your business from criminals, terrorists, and Politically Exposed Persons (PEPs). There are three levels of due diligence, namely Simplified Due Diligence (SDD), Basic Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD).
Basic Customer Due Diligence is the standard check performed on all clients to verify their identity and evaluate the risks associated with them. It is usually implemented during the onboarding process.
Meanwhile, Simplified Due Diligence is used for situations where the risk for money laundering or terrorist funding is low, such as on low-value accounts or transactions below a certain amount. In these cases, a full CDD is not necessary and a minimal check is carried out on the customer.
Finally, Enhanced Due Diligence is carried out on customers that pose higher money laundering risks, such as PEPs. In order to mitigate those risks, financial institutions may ask these clients to provide additional identification and establish their source of funds, in addition to examining and monitoring their transactions more closely.
Ongoing Monitoring
Ongoing Monitoring rounds out the effective KYC system by providing banks and financial institutions with a valuable oversight of their customers’ transactions throughout the course of their business relationship. This is important because it allows the financial institution to detect abnormal patterns of behavior that may not be immediately apparent during the onboarding process or by scrutinizing individual transactions.
Customer Screening
Customer Screening refers to the process of comparing the data that a bank or financial institution has about its clients against external heightened risk data sources such as sanctions lists, watch lists, PEP lists, and adverse mentions in the media. Its primary purpose is to help the organization manage the risks associated with doing business with bad actors such as sanctioned persons or wanted individuals, as well as higher-risk customers such as PEPs. Like KYC, Customer Screening is mandated by anti-money laundering laws of most countries.
A good Customer Screening solution provides accurate screening of clients while helping financial institutions meet all current anti-money laundering and counter-terrorist funding legislation. Additionally, it should allow organizations to satisfy anti-bribery, anti-corruption, export control, and other legal regulations.
With a comprehensive customer due diligence solution in place, you can easily prevent your enterprise from becoming an accomplice to financial fraud and crime. In addition, such a system can provide a 360-degree view of your customers throughout the course of your business relationship. Indeed, such a platform enables your organization to streamline the onboarding process for new customers, identify risks more quickly, and confidently take action when necessary.
