For those involved in banking, financial institutions, or insurance companies, they might be familiar with KYC and CDD as these two terms play a significant role in getting to know the customers to enhance operational efficiency and to mitigate the risks associated with illegal transactions. KYC, which stands for “Know Your Customer,” involves a process where customers verify their identity. However, after the identity verification process, another procedure that banking operators need to undertake is CDD, or Customer Due Diligence. This process entails verifying the factual details of the customers. In this article, we will explore what CDD involves and why it is important. Let’s find the answers together in this article.
What is CDD?
CDD, standing for Customer Due Diligence, is the process of verifying the actual facts about customers. This involves inspecting customer data such as their true identity and the information they present to the bank, etc. The purpose of conducting CDD is to confirm the information of the service users and to prevent the risks of the bank being involved in fraudulent activities or violating the laws.
The verification process of CDD
The operation of monitoring and verifying customer information through CDD can be divided into 4 steps, which are as follows :
1. Assessing customers at risk of money laundering
This is a step carried out in conjunction with the customer approval process. The bank takes on the role of collecting the customer’s data to assess the risk of money laundering, which is divided into three levels: low, medium, and high. The bank uses criteria set by the Thai Bankers’ Association. They will scrutinize transaction details that raise suspicions of money laundering, such as the type of business, the address of the customer, etc.
2. Reviewing customer data
This is a process of regularly checking the current status of customers. The bank may set a time frame for reviewing the data, such as reviewing customer data every 2 – 5 years, etc. The reviews can vary from low-risk customers to high-risk ones. For high-risk customers, regular checks should be instituted. The aspects that the bank needs to verify with the customers include :
1. Whether the customer has good financial movements or not.
2. Whether the customer still maintains a relationship with the financial institution for the original intended purpose or not.
3. Whether the level of risk in money laundering activities associated with the customer has changed or not.
4. Whether the bank should continue the relationship with the customer or not.
3. Sanction List Verification
This is a process that the bank undertakes before initiating a relationship with a customer. The process involves checking that the customer is not an individual who has a history of offenses related to money laundering or has committed crimes involving the illicit support of funds or involvement in terrorist activities, and is not listed in the official watchlist or by AMLO (Anti-Money Laundering Office). It is a critical step to ensure that the bank is not inadvertently aiding illegal activities by establishing a relationship with individuals or entities involved in criminal actions.
4. Reporting Suspicious Transactions
This is a process where the bank needs to identify certain types of transactions that are dangerous or suspect of being involved in money laundering or illegal activities. The bank must report such suspicious transactions to the AMLO (Anti-Money Laundering Office) and terminate its relationship with such customers.
How is CDD important to the business?
1. Enhancing Security for Service Providers and Users
Implementing CDD helps to secure various financial transactions, benefiting both service providers and users. From the service provider’s perspective, conducting CDD allows organizations to better understand the customers who utilize their services, facilitating a safer and more secure business environment.
2. Reducing the Risk of Engaging in Illegal Activities
In the current times, there is a surge in various forms of unlawful activities surrounding financial transactions. Therefore, implementing CDD acts as a preventative measure to mitigate the risks associated with engaging in illegal activities, such as money laundering or financing terrorist activities, among others.
3. Reducing Errors in Customer Verification
Carrying out the verification and monitoring of the status of customers in financial institutions requires meticulous scrutiny. Undertaking this task internally could potentially lead to mistakes due to human error. Hence, employing KYC (Know Your Customer) and CDD (Customer Due Diligence) services can significantly decrease the likelihood of information discrepancies and foster swiffer verification processes, thereby enhancing operational efficiency.
It is evident that Customer Due Diligence (CDD) plays a crucial role in financial transactions nowadays, whether it pertains to service providers or users. This is because it helps reduce the risk of financial law violations, including preventing money laundering or various forms of terrorist financing, helping maintain the reputation of financial institutions or banks, and ensuring they remain trustworthy in the eyes of service users.