Customer Due Diligence (CDD) is a vital element of the Know Your Client (KYC) process for financial institutions to detect and deter criminal threats. These steps ensure compliance with Anti-Money Laundering (AML) laws. Criminals are growing sophisticated while deploying several techniques to conceal their proceeds of crimes and escape regulatory checks. Financial institutions that lack efficient customer risk assessment are more likely to become a threat to criminals.
EDD compliance aids as an additional strategy to identify high-risk customers, accounts, and activities. These checks protect financial institutions from criminal threats. Integrating AI-powered enhanced due diligence solutions can further improve security against fraudsters.
Let’s discuss EDD Compliance and how Ultimate Beneficial Owners’ (UBOs) identification makes it more reliable.
Customer Identification Programs (CIP) and the Importance of EDD in Banking
Criminals are laundering a considerable amount of money, between $800 million and $2 trillion annually. Considering this significant increase from previous decades, banks must build efficient crime prevention mechanisms to conceal their systems against fraudulent activities. They help prepare customer risk profiles by taking the necessary steps to perform identity verification checks in return. Edd in banking helps assess threats possess of money laundering and other financial crimes.
CIP is the first initiative to perform EDD compliance and risk assessment. Whether it’s an individual or a company, it enables financial institutions to identify the criminal threat they possess. Furthermore, they can categorize customers from more to less risky and assist them accordingly. Thus, EDD compliance procedures help banks obtain the necessary information for crime prevention.
CDD and enhanced due diligence in AML outline the suspicious activities associated with a particular bank account holder. Similarly, with clearly defined policies, risk-based approaches, and effective EDD banking measures, financial institutions can carry out CIPs efficiently. Furthermore, they can implement necessary crime prevention mechanisms while staying put with compliance and reposting suspiciousness to authorities in time.
EDD Specifications in the European Union (EU)’s AMLDs
Considering the increase in financial crimes, legal authorities are calling on financial institutions to implement EDD compliance requirements. In Article 18 of its Fourth Anti-Money Laundering Directive (AMLD), the EU obliges every country falling on the High-Risk Third Countries list to perform EDD. Similarly, threat-possessed customers, Politically Exposed Persons (PEPs), their associates, close friends, and family members, should also be a part of the digital KYC verification process.
The 6AMLD came into force in December 2020 with additional pressure on financial institutions to perform enhanced due diligence. Otherwise, negligence in identifying illicit funds flow will expose customers and organizations to legal penalties. After the Russian-Ukraine 2022 riots, financial institutions are undergoing more strict scrutiny. As per requirements set in 6AMLD, countries should keep their watchlists, sanction records, and other information up-to-date for restricting criminal activities taking place worldwide.
Financial institutions are associated with multiple industries, among which some are highly risky such as gambling, cryptocurrency, and trading. They must perform enhanced due diligence to secure these affiliated sectors against money laundering threats. Furthermore, regulatory bodies have set certain threshold limits for transactions. If any payment exceeds them, e-KYC verification and EDD mechanisms flag it so financial institutions can report them to legal authorities.
EDD Measures Put Forth by the Financial Action Task Force (FATF)
In its 40 Recommendations, FATF highlights the necessity of integrating EDD compliance measures and risk-based approaches for financial institutions. These mechanisms have come with advanced technologies since digitization took over. Financial institutions can easily integrate EDD in KYC and stay put with FATF’s legal requirements. Some of the practical steps for enhanced due diligence include:
- Obtaining identity information from additional sources and global databases for efficient risk assessment.
- Conducting cross-verification across watchlists, PEPs, sanctions, and adverse media.
- Validating UBOs and enhanced due diligence reports to identify criminal intentions.
- Performing authentication for sources of funds, financial activities, and ongoing transaction monitoring.
- Detecting suspicious activities and payments that exceed the threshold limits.
- Preparing reports for criminal activities and submitting them to respective legal authorities.
Improving the EDD compliance mechanism is becoming more of a norm for financial institutions to counter the spike in FinCrimes. While the regulatory landscape is changing, technologies to perform efficient customer identification are becoming more capable. Implementing AI-powered KYC as a service with EDD enables financial institutions to grow exponentially while safeguarding their operations against money laundering and other criminal threats.