In a hyper-digital world, the need for customer due diligence has never been more imperative to the identity confirmation process.
In a post by RegTech firm PassFort, a Moody Analytics Company, the firm outlined four core pillars of customer due diligence for those in the banking sector.
The company said, “Customer due diligence is a process used by financial institutions to verify a person’s identity and to assess any risk associated with them. This might be a process that takes place before a new customer is onboarded or it might happen at intervals throughout the customer’s lifecycle with the bank to ensure nothing has changed in their risk profile.”
Customer due diligence is designed to prevent criminals and terrorist organisations from gaining access to the financial system to launder money acquired through illegal means.
According to PassFort, a bank’s approach to prevention, detection and punishment starts with customer due diligence – aimed at using data to identify and verify a customer to ensure they aren’t a criminal.
The firm remarked, “Due diligence could be carried out on a person opening a current account or it could be investigating a person who owns a business the bank will be transacting with.
“The FI wants to understand the individual and their source of funds to ensure they are legitimate and to comply with regulation. The aim of CDD is to create clarity for FIs so they know who they are doing business with and the risks of doing business with them.”
So what are the key pillars of customer due diligence? In the opinion of PassFort, these include identifying and verifying the identity of customers as well as identifying and verifying the identity of the beneficial owners of companies opening accounts.
Another key part of CDD is understanding the nature and purpose of customer relationships to develop customer risk profiles. In addition, conducting ongoing monitoring to identify and report suspicious transactions is also key.
In the UK, CDD is required to comply with anti-money laundering regulations that are overseen by the FCA. In the EU, anti-money laundering directives (AMLD) are updated and published periodically to harmonize regulation across member states.
There is also a global Financial Action Taskforce (FATF) with 36 member states that include all the major financial centers in the world and whose published standards comprise “a comprehensive and consistent framework of measures, which countries should implement in order to combat money laundering and terrorist financing.
PassFort concluded, “To know who you are doing business with and to assess the risks of doing business with them, data checks are needed. These CDD checks fill in the picture of who the customer is and what kind of risk they might pose to you.”
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