Certainly “what are the 4 Customer Due Diligence requirements for businesses” is one of the most asked questions in the compliance sphere today. To guard against anti-money laundering and terrorist financing, Businesses are required to carry out standard Customer Due Diligence (CDD) procedures for risk assessment. Although Customer Due Diligence procedures vary depending on the type of customer relationship, there are four standard steps that every business must follow to satisfy compliance requirements.Our post on What is CDD in banking- Everything you need to know covers how to efficiently carry out the customer due diligence process.
In this article, we would be discussing the 4 Customer Due Diligence requirements for businesses, what they entail and how you can go about them as a business owner.
What is Customer Due Diligence (CDD)?
Customer Due Diligence is the process of collecting and evaluating information provided by a customer or potential customer. It is an important operation, especially for organisations in the financial industry for Financial Crime Compliance (FCC).
Who does the Customer Due Diligence (CDD) procedure affect?
The Customer Due Diligence (CDD) rule applies to banks, brokers in mutual funds, securities, future commissions, finance merchants and businesses that handle financial transactions on behalf of customers. The CDD Rule which amends Bank Secrecy Act regulations, helps banks know who their customers are. This makes it harder for criminals to hide behind fake companies and steal money.
What are the components of Customer Due Diligence (CDD)?
There are four components or requirements of CDD, which include:
- Customer identification and verification
- Understanding the nature and purpose of the business-customer relationship
- Beneficial ownership identification and verification
- Ongoing monitoring for suspicious activities
These four points answer the question, “What are the 4 Customer Due Diligence Requirements for Businesses?”
What are the types of Customer Due Diligence (CDD)?
There are three types of CDD. They include:
- Standard
- Simplified
- Enhanced
Simplified Customer Due Diligence
Simplified Customer Due Diligence is applied when a customer risk assessment process has proven the business-customer relationship to have a low potential for money laundering and other financial crimes. In such a situation, the business is only required to identify the customer and not necessarily verify his or her identity.
Standard Customer Due Diligence
This type of CDD involves identifying the customer through reliable independent sources. The purpose of this process is to identify the nature of the business-customer relationship and take subsequent actions where necessary.
Enhanced Customer Due Diligence
This CDD is applied when the risk of money laundering/ terrorism financing is high, e.g if the customer is a Politically Exposed Person (PEP) or from a high-risk nation. The extra processes carried out for enhanced due diligence may include:
- Requesting additional information from the customer
- Establishing the intended nature of the business relationship
- Obtaining information on the source of the customer’s funds or wealth
- Establishing the purpose of the transaction
- Carrying out ongoing monitoring of the customer’s activities
Read also: The Role of CDD in Eliminating the Risk of Open Banking
What is Enhanced Due Diligence (CDD) Checklist?
Enhanced CDD is the extra steps taken for proper risk assessment when the customer is a PEP or from high-risk countries. Generally, it is carried applied when the business suspects a high level of AML/CFT risks as part of the KYC procedure.
Enhanced Due Diligence Checklists involve:
- Adequately assessing and understanding your customers’ risk profile
- Requesting and obtaining additional information where necessary
- Conducting excessive background checks and ongoing monitoring of transactions
- Collecting and organising data collected in line with global and regional compliance standards
Read also - Identity Verification as a Service – Fast Tracking The Global Digital Economy
What are the 4 Customer Due Diligence Requirements for Businesses?
The 4 Customer Due Diligence Requirements for Businesses include:
1. Customer identification and verification
This is the basic process of identifying and verifying the identity of the customer. It is a standard CDD procedure that is mandated by law for businesses in the finance industry to adhere to.
2. Understanding the nature and purpose of the business-customer relationship
After identifying and verifying the customers’ identity. The next step is for the business to assess and understand the nature and purpose of the business-customer relationship. This is to understand the kind of activities and transactions which the customer would carry out during the relationship.
3. Beneficial ownership identification and verification
This procedure could be skipped or not depending on the specific type of customer. The beneficial ownership identification and verification step are used when the customer is acting on behalf of another beneficial entity. In this situation, the business should seek to identify the beneficial owner and verify their identities.
4. Ongoing monitoring for suspicious activities
This is the final step of the 4 customer due diligence requirements. It simply involves continuous monitoring of the customer account for suspicious activities after understanding their risk profile.
Read Also - How To Check if a Company is Registered in Nigeria
Achieving Customer Due Diligence (CDD) by Leveraging AI Technology
The step-by-step process of carrying out customer due diligence must be painstakingly followed to avoid errors. However, for the most effective outcomes, CDD and KYC processes are built by combining technology and expertise. As risk profiles and criminal intelligence evolves, financial institutions should be prepared to be flexible and adapt to their CDD approach to satisfy AML/ CFT regulations.
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Frequently Asked Questions on Customer Due Diligence Requirements
1. What are the four key elements of a customer due diligence program?
The four key elements of a customer due diligence program are Customer identification and verification, understanding the nature and intent of the business-customer relationship, beneficial ownership identification and verification and continuous monitoring for suspicious activities.
2. What is Customer Due Diligence Requirement?
Customer due diligence (CDD) requirements are the important checks that banks and other financial institutions carry out on their customers. These checks help to understand who the customer is and the potential risks involved in doing business with them.
3. What are the documents required for CDD?
The documents required for customer due diligence vary depending on the specific bank, the type of customer that is (individual or company), and the risk level associated with the customer. However, the general documents required for CDD for individuals are proof of identity, proof of address, tax identification number (TIN), source of income or employment details.
The documents required for CDD for companies may include company registration documents (such as certificates of incorporation, and articles of association), beneficial ownership information ( such as shareholder agreements or trust deeds), and financial statements.
4. What is required for a CDD?
The basic requirement for CDD is the verification of the customer's name, address, DOB, and photo ID. After this, they undergo screening to ensure they are not on any prohibited list or news.
Updated: July 11, 2024
