Customer Due Diligence – it is another modern day check that makes KYC a success. Under this, the bank collects the required information on the customers to ensure the client fits their risk profile. Customer Identification program based on the Customer Due Diligence helps in understanding the transaction limits, the record retention, among other things. Customer Due Diligence is not a onetime process; rather the authorities should conduct periodical checks and also record any anomaly seen.
CDD has three levels: Standard Due Diligence, Simplified Due Diligence, Enhanced Customer Due Diligence (PEP Check and Sanction Check)
Standard Due Diligence applies to all clients, unless they fall into ‘simplified’ or ‘enhanced’ due diligence level. Simplified Due Diligence (SDD) is the way to go when a customer is perceived to pose a lower risk of money laundering. On the other hand, if banks or any other institution offering service believes the customer should be subject to greater scrutiny, Enhanced Due Diligence (EDD) approach is taken. EDD is the information collected over and above the SDD process for customers in the ‘high risk’ category.
Simplified or the Enhanced Due Diligence, helps in making KYC of a customer foolproof. Tracking the transactions and identifying anything that is unusual is generally the first trigger that should alert the authorities for conducting the Enhanced Due Diligence (EDD) on the customer. For instance, if a business selling a definite nature of product or service suddenly breaks into any new stream of business, it should be the trigger for the authorities to look into such developments and transaction. There are various other factors that determine whether the customer should be put in the SDD or EDD level. Some of these factors are:
- Nature of the Business
- Purpose which the customer states while opening the account or availing the service
- Nature of transaction, volume and also frequency at which the transactions are made
- Source as well as the destination accounts where the funds transfer are being made and frequency of these transactions
- Documentation of the business
- Type of customers that the business, who is availing the service has
- Beneficiary or the beneficial owner of the account
- Reputation of the business and list of clients
- Location of the business