The Value of Customer Due Diligence

Written by Dmitri Laush, CEO of GetID, an omnichannel identity verification solution

Emerging technologies open a box of new features and shape new directions. But in addition to that, they also provide more power and yet unseen capabilities for cyber criminals. The world changes and different regulatory bodies follow along, becoming more sophisticated in fighting the new wave of money laundering schemes.

The development of advanced anti-money laundering (AML) regulations and enhanced customer due diligence (CDD) requires more attention in order to combat the ongoing struggle with money laundering effectively. Increased security standards are a must, but along with it come higher costs, friction, and compliance staffing.

Where is the shield, where is the sword? Today’s modern criminals constantly redefine and improve their techniques, while it appears as though CDD practices still suffer from outdated practices.

Clunky, manual customer due diligence processes mean that AML compliance is slow, expensive, and overly complicated. As a result, several financial institutions fall short with inadequate CDD programs. 

However, with regulatory authorities hot on the tails of inadequate AML programs, financial institutions can no longer afford to ignore the need for comprehensive CDD processes. If AML procedures don’t conform with regulations, financial institutions face jaw-dropping non-compliance fines.

What is Customer Due Diligence?

CDD (customer due diligence) is one the fundamental stages of the complex process of confirming a customer’s identity and monitoring their behaviour during various business matters.

A must-have for financial institutions and specific companies, CDD helps to effectively prevent financial fraud, violations, and crimes such as money laundering. In line with anti-money laundering (AML) regulations, CDD requirements demand that organizations identify and report suspicious activity to the relevant authorities. 

Nevertheless, AML policies and CDD standards also apply to non-banking organizations. Legislation on this matter does differ from country to country, but the tightening of these regulations is a trend that can be observed globally.

Such businesses include many different parties, such as:

  • Money service businesses
  • Accountancy service providers
  • Telecommunications companies
  • Real estate agency services
  • Art market and high-value dealers

Long story short, firms that offer various financial services, including crypto exchanges and digital currencies, can’t operate without having AML policies in place – meaning they have to complete comprehensive customer due diligence.

The rising importance of due diligence 

Due diligence is related to many procedures starting from KYC (know your customer) to customer behaviour during the initial stage of business and until further changes in state and transaction checkups.

While customer due diligence is mandatory for some  institutions, this doesn’t mean that every user needs to be exposed to an extensive verification and monitoring process. 

Regularly updated AML regulations are meant to hamper international financial crime. But still, there seems to be no end to it in sight, as studies are showing these types of crimes are increasing to a pandemic-like level. It is estimated that the total amount of money laundered globally stands between $800 billion and $2 trillion every year! No need to emphasize the importance of CDD further. 

There are currently three levels of customer due diligence, each related to the level of risk that a customer poses: simplified (SDD), standard (CDD), and enhanced (EDD).

CDD processes are the real sentinels on the way to illicit financing operations and fraudulent actors. It provides a much-needed shield against popular, widespread criminal activities, such as money laundering, tax evasion, fraud, terrorist funding, and more. Nonetheless, the absence of due diligence may lead to huge fines for non-compliance.

Robust CDD processes act as reliable anti-money laundering measures to prevent fraud. And the system works – for example, in 2018, suspicious activity reports (SARs) sent to regulatory authorities helped stop $2 billion worth of unauthorized transactions in the UK alone. In a survey conducted in March of last year, nearly half of the respondents globally stated that enhanced technologies help to drastically improve KYC procedures during the relationship check-ups.

The challenges of current CDDs

Taking into account the reasons stated above, why is customer due diligence quite so clearly such a critical measure and why are multiple financial institutions neglecting it? Why is the failure to comply so damaging?

There are a few reasons for this:

  • The CDD processes are taking too long and cause onboarding friction
  • Compliance costs rise significantly over time
  • Absence of global standard for user verification leads to low-quality data
  • More regulations lead to shortages of staff 

While this field grows, the need for personnel also rises. In the US alone, AML compliance teams have increased more than 10x times between 2012 and 2017. The staff numbers will only continue to grow to deal with the issues and inefficiencies in CDD processes including double-checking of all high-risk transactions. 

And with highly professional staff comes increased costs. For example, with the average UK compliance salary reaching over $140,000 a year, it’s quite challenging for small companies to onboard a decent specialist. 

Furthermore, this challenge never ends as regulations become tighter and sophisticated, while will require more compliance staff. And with such outcomes, a trend must change if we don’t want to follow the path with no future. To save funds in an effective way, next-gen automated solutions step into play, ensuring AML and CDD compliance without the need to have sizable compliance teams in place.

Redefining future of security

However, new solutions can solve this issue by enabling automated customer identity verification and authentication and monitoring processes. More and more companies are aimed at using the latest developments to save time, money, and resources while guaranteeing AML compliance now and for the future.

While we further progress into the future of digital reality, AML regulations only tend to increase. The drawbacks of these situations are the increased CDD practices, which will also hamper the compliance costs and drastically increase the time required for onboarding.

Meanwhile, unlike the outdated manual solutions for KYC and CDD processes that offer slow, expensive, error-prone routes to compliance, compliance solutions with faster and smoother experiences are currently in development. 2020 is all about speed and reducing costs, and fully automated systems can do the trick to cut off the need for expensive compliance staff, which will soon be a relic of the past.

Speaking of the future, 63% of European professionals involved in M&A transactions believe that by 2022 the General Data Protection regulation will increase acquirers’ scrutiny of the data protection policies and processes of target companies.

In such circumstances, there must be a solution that checks everything off on your customer due diligence checklist and technology that future-proofs your business against increasing AML compliance. The company that rolls out a simplified multilayered due diligence solution with advanced scalability offering unmatched security while effectively reducing the inaccuracies in the onboarding and monitoring process will certainly win.

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