Know Your Customer (KYC) vs. Client Due Diligence (CDD)

Howard Schulman

Know Your Customer (KYC) and Client Due Diligence processes are similar, but there are some differences. The former involves getting a customer’s data before starting a business relationship, enabling the business to create a customer’s risk profile. In contrast, CDD involves verifying the information given by a customer. CDD also entails conducting background and ultimate beneficial ownership tests.

Client due diligence is an ongoing process carried out regularly depending on the business needs. The amount of money laundered ranges between $1.6 trillion and 4 trillion every year. Businesses incur huge losses and stunted growth due to such activities, hence the need for KYC and CDD processes.

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Running an Effective Know Your Customer and Client Due Diligence Program

KYC leads to CDD in verifying the information provided by customers. Past KYC procedures have now developed into CDD practices. In the past, the KYC process was not as effective in preventing criminal activity. This led to the development of software that automates the entire process. This has helped institutions that carry out many transactions. It is easy to run both real-time and regular checks. The CDD process should continue all through the business relationship because a customer’s risk profile might change over time.

Most financial institutions’ are concerned about accidentally getting involved in money laundering activities. This is due to the strict sanctions put in place by regulatory bodies. For that reason, it is important to have a sound KYC program that prevents potential risks. A good KYC and CDD program should not only identify a customer but also track their account activity. The program should have guidelines on how to manage risks should they occur.

A strong KYC and CDD program should have the following features.

Customer Acceptance Policy

A KYC policy should outline requirements that customers need to fulfill before admission. It should also outline the kinds of risks that particular customers may pose. Higher risk customers like politically exposed persons need a rigorous CDD process. The policy should state the controls for this process. A customer acceptance policy should not be unnecessarily restrictive so as to avoid denying disadvantaged customers a chance.

Customer Identification

Banks should verify new customers’ identities before entering into a business relationship. As a result, a systematic identification procedure should be in place. Businesses should use identification documents that are hard to forge or obtain illegally. A good KYC program outlines a robust CDD procedure for foreign customers. Identification procedures should also be thorough when dealing with ultimate beneficial owners.

Ongoing Monitoring

Ongoing monitoring of onboarded accounts is critical. Businesses should have a wide understanding of normal account activity to avoid completing unlawful deals. It is important to have controls in mind when developing a good KYC program. It should lay out limits for particular types of accounts so that it is easy to detect unusual activity. Businesses ought to be on the lookout for transactions that do not make economic sense. These may signal fraudulent activities that result in losses. A good KYC process includes activities that prompt extensive due diligence.

Risk Management

A good KYC program should have proper procedures that work efficiently. It should be explicit in outlining responsibilities across the business. This is to ensure that there are clear channels of reporting suspicious activity. Additionally, businesses should have internal procedures that explain the course of action should risks occur. Examples are conducting internal audits and having clear standard operating procedures. Businesses also need to have a bold external audit process. This ensures that the business is following regulations to the letter.

Training

Businesses must train their staff for the KYC and CDD procedures to work effectively. This is because of the many challenges that come with the strict acts put in place. Businesses should identify areas that need special attention and train on them. Training should stress the importance of effective KYC and CDD procedures. Businesses ought to outline the controls for every role to prevent exposure to risks. Training also ensures that staff fit into their roles with ease.

How to Improve KYC and CDD Procedures

These procedures involve gathering and evaluating information which is a time-consuming process. Delays result in and loss of potential customers especially during the KYC process. For this reason, businesses should adopt practices that ensure a fast yet compliant process.

Good KYC and CDD procedures emphasize quality of checks, and both manual and automated reviews should be conducted. This will involve the use of sophisticated imaging software to capture data during KYC. In addition, monitoring software makes the CDD process easy and very accurate. But human interaction with customers should not be completely phased out. This is due to the extent of risks in the finance sector.

KYC and CDD procedures should also be convenient for customers. This ensures a good customer relationship from the beginning. Businesses need to come up with ways to automate time-consuming KYC procedures. Good KYC and CDD procedures also allow for the reusability of data. This is to avoid having to ask customers for information many times, which is frustrating. Businesses should adopt software that only requires a one-off document upload.

The most important feature of KYC and CDD procedures is to prevent fraud. So, these procedures should be secure from access by unauthorized people.

Developing an Effective Anti-Money Laundering Program

AML programs guide Know Your Customer and Client Due Diligence procedures. To develop an effective AML program one needs to understand the business structure. This helps to identify the risks the business may face during its operation. A strong AML program is flexible to risks, new legislation and regulations. It ensures that businesses take a dynamic approach to risk management. Also, it discourages potential fraudsters right from the start.

Effective AML policies also need alertness during KYC and CDD procedures. All staff should have a wide understanding of money laundering. This enables them to identify launderers with ease during KYC. It should also be easy to identify suspicious activities during CDD procedures. As risks evolve, KYC and CDD procedures should get firmer. Learn more about KYC and CDD processes at lightico.com.

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