Customer Due Diligence – Smart Know Your Customer Practices

Customer Due Diligence - Smart Know Your Customer Practices

The financial services sector has always been tightly regulated and has struggled to meet compliance requirements. In order to meet their anti-money laundering (AML) compliance requirements, banks and financial institutions have to conduct a thorough customer due diligence process. Every transaction poses a number of risks to them thus increasing the need for robust compliance structures. Banks have to establish effective Know Your Customer (KYC) procedures. They are used to monitor the risk associated with a particular client.

KYC procedures help a company ensure that they are implementing AML regulations in an effective manner. The steps involved in a practical KYC procedure include ascertaining the identity of the customer; evaluating the customers’ financial activity; and appraising the risk of money laundering an account poses to the company. In order to implement such a KYC procedure effectively, there are different levels of due diligence that needs to be carried out. Some smart practices for know your customer requirements involve;

Customer Verification

The very first step towards enabling an effective due diligence process is to establish the identity of the customer. A bank or financial institution must make sure that the identification provided by a customer is authentic and verifiable. It is the bare minimum requirement for an effective KYC procedure. For clients that pose the lowest possible risk, conducting only basic but thorough verification is enough. A simple current or savings account may only require a basic document verification and facial scanning procedure for the customer, both of which can be performed digitally as well as remotely. This process can also be referred to as basic due diligence wherein the underlying risk is assessed for the client.

Enhanced Due Diligence

In the Enhanced Due Diligence (EDD) process, managers need to acquire additional information from the client in order to evaluate the level of risk they pose. It is primarily performed for high-risk clients and is done to attain an in-depth idea of their assets, credit line and how much of a risk they are to the bank. To perform EDD the manager or the bank needs to go through a proposed customer due to diligence checklist. It should be a distinct and precise process wherein all the aspects of the risk types are covered. Proper documentation should be done to keep a record for legal and compliance purposes. More than anything, maintaining a proper and steady EDD process reflects that the financial institution is earnest about KYC processes. An internal database or back office log must be kept of all the accepted or declined clients with details of reasons they were accepted or rejected.

Most importantly, the KYC and customer due to diligence processes must be made efficient and effective. Modern technologies like AI and machine learning have given rise to the Fintech industry and have enabled financial institutions to streamline their procedures. They can verify clients within seconds and perform AML screening checks in real-time to look for Politically Exposed Persons (PEPs). With these best practices, the financial services sector can mitigate the risks of money laundering and fraud.

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