The critical role of Customer Due Diligence in the financial sector

In the financial services there is more and more stringent laws and regulations and new methods of criminal money laundering. That's why optimizing Customer Due Diligence processes for financial institutions is a crucial step to stay compliant and minimize risks. In this blog, we will delve deeper into this topic. ‍

What is Customer Due Diligence?

In the financial sector, it's very important to know who you're doing business with. Customer Due Diligence (CDD), also known as customer research, is a process where financial institutions identify, verify, and assess their risk profiles. The concept of Know Your Customer provides a broader context for this process. ‍

What is Know Your Customer?

Know Your Customer (KYC) covers various aspects, such as creating customer profiles, monitoring and reporting unusual transactions to authorities. It sometimes happens that CDD and KYC are confused, which is why it is important to recognize the differences.

The difference between CDD and KYC

KYC takes a broader approach and focuses on the complete customer profile and risk management, while CDD specifically examines individual customers. By integrating both processes, financial institutions create a solid basis for their compliance and safety measures. This is how they actively comply with strict regulations and ensure the integrity of their services.

The essential steps of Customer Due Diligence

Customer Due Diligence includes four main processes, as described below:

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1. Identification and Verification
   The customer's identity is verified by the CDD Analyst on the basis of identity documents and/or government registers, such as the Chamber of Commerce. This confirms that the financial institution is actually doing business with the right counterparty and, for example, prevents identity fraud.
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2. Risk Assessment
   After identification and verification, the financial institution assesses the integrity risks that may be associated with the customer relationship. This is based on factors such as business activities, transactional behavior, or status as a PEP (Politically Exposed Person, someone who performs a prominent political position).
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3. Enhanced Due Diligence
   In some cases, the basic research shows that there are significant risk factors associated with the (potential) customer relationship. Usually, CDD analysts then apply Enhanced Due Diligence. In doing so, they can collect additional information or seek advice from a specialized third party.
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4. Periodic review
   After customer research and (re) acceptance of the customer relationship, regular review takes place. Based on the risk classification and activities, the customer is continuously monitored or reassessed periodically. This updates documents and reconsiders risks in accordance with the latest internal policy and external laws and regulations.

The Wwft

Financial institutions benefit greatly from setting up a strong CDD process and the most logical step is to comply with laws and regulations. That is why, since August 1, 2008, the Wwft (Money Laundering and Terrorist Financing Prevention Act) in force.

The Wwft requires financial institutions to carry out thorough customer research. By complying with these laws and regulations, they prevent possible sanctions or fines from the supervisor. Additionally, they demonstrate a commitment to maintaining high standards of integrity. In doing so, they contribute to the stability and transparency of the financial system.

The benefits of a strong CDD process

Customer Due Diligence is not only carried out to satisfy the supervisor. A metaphorical statement that applies to this is: “You don't brush your teeth for the dentist, but for yourself.” This illustrates the benefits of CDD for financial institutions:

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• Reducing the risk of illegal activities
  Customer research reduces the risk of getting involved in illegal activities, such as money laundering and terrorist financing.
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• Safe financial environment
  A strong policy creates a safe environment for financial transactions and guarantees the integrity of financial transactions.
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• Preventing identity fraud and unlawful information
  It prevents identity fraud and the unlawful sharing of personal or sensitive information, thereby protecting the privacy and safety of customers.
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• Strengthening customer trust
  A good policy strengthens customer trust in financial institutions, which can lead to long-term and successful customer relationships.
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• Ensuring the safety of assets and personal information
  Implementing and enforcing a thorough policy ensures the safety of customer assets and personal information.
  

Why is CDD important in the financial sector?

The financial sector attracts criminals who try to launder money or finance terrorism. As intermediaries in moving and managing money, banks and other financial institutions must have effective CDD policies. In this way, they prevent accidental involvement in illegal activities and the associated financial and legal consequences.

Customer Due Diligence helps companies protect their reputation. Association with money laundering or terrorist financing can cause major damage. This includes customer loss, fines, legal issues and license revocation, among others. A thorough CDD policy shows responsibility and corporate social responsibility.

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