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Customer Due Diligence Regulation Explained
Anti-Money Laundering (AML)
Customer Due Diligence
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Customer Due Diligence Regulation Explained

Explore the essential customer due diligence regulation for businesses. Learn how CDD money laundering regulations help screen and monitor customer for illegal activities.

Customer Due Diligence (CDD) is a critical component of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF). The process involves regulated entities gathering and verifying personal information (including name, address, date of birth, and Government issued ID documents), to ensure customers are who they say they are and identity financial crime risks.

CDD regulations are designed to ensure that businesses have the knowledge and guidance required to implement effective CDD processes and prevent the risk of money laundering and other illicit activities.

Overview of CDD regulations

Various regulatory bodies are established globally to govern CDD regulations, each aiming to enhance the transparency and integrity of businesses and their relationship with customers. The main regulatory bodies & regulation includes:

Financial Action Task Force (FATF)

This is a global regulatory body that sets standards and promotes effective implementation of AML and CTF measures. FATF recommendations form the basis for many national and localised CDD regulation.

European Union (EU) due diligence regulation

The EU has established several directives aimed at CDD at AML, including the 5th and 6th Anti-Money Laundering Directives (5AMLD and 6AMLD), which mandate comprehensive CDD measures for financial institutions within its member states.

The USA Patriot Act

This legislation includes various provisions for AML, including stringent CDD requirements for regulated entities operating in the United States. The Patriot Act specifically requires institutions to establish a robust due diligence program, ensuring that all customers have their identity verified at the point of account opening.

The UK Money Laundering act

Governed by the UK’s Financial Conduct Authority (FCA), these regulations require businesses to implement robust CDD measures to prevent money laundering, terrorist financing, and other illicit activities.

Latest CDD regulation

Regulatory bodies are continually updating CDD regulations to enhance the growing risk of money laundering and fraud. The most recent updates add more pressure for regulated entities to utilise advanced CDD compliance processes to stay ahead of the fight against financial crime. Some of the recent updates include:

The 6th Anti-Money Laundering Directive introduced stricter penalties for non-compliance and extended the scope of predicate offenses for money laundering. The directive also introduced a closer focus on verifying Ultimate Beneficial Owners (UBOs) which has put more focus on businesses implementing Know Your Business (KYB) procedures.

In the USA, FinCen’s new CDD rule also requires financial institutions to identify and verify the identities of beneficial owners of legal entity customers. The introduction of beneficial ownership verification has followed in multiple jurisdictions due to the rising risk of fraud and money laundering in B2B relationships.

The UK’s Economic Crime Levy aims to raise funds to tackle economic crime, impacting firms regulated under money laundering regulation. Any entity whose UK revenue exceeds £10.2 million per year is required to pay the levy and it is collected by the Financial Conduct Authority (FCA), the Gambling Commission (GC), and HMRC.

Challenges of CDD regulation

Whilst the majority of customer due diligence regulation aims to achieve the same result of keeping businesses and customers safe from money laundering and financial crimes, there are naturally nuances between the regulation which makes cross-jurisdiction compliance even more challenging for regulated entities.

Complexity of regulations is one of the biggest challenges facing businesses needing to implement CDD processes. Different jurisdictions have varying CDD regulations, making it difficult for global entities to develop a uniform compliance strategy.

Not only are regulations complex, but they are also ever evolving. Regulatory bodies frequently update CDD requirements to address emerging risks, changing customer behaviour, and external factors. Regulated entities need to stay agile to continuously adapt their CDD policies, KYC and AML processes, and fraud prevention measures.

Adapting to changing regulation can also be resource intensive. Implementing effective customer due diligence measures is costly from a technical and workforce perspective, meaning that reliance on legacy systems can lead to security risks if the business isn’t willing to adapt to new requirements.

Finally, the CDD process involves a significant amount of data from customer screening. To remain audit-proof, entities are required to securely store all verification data across platforms and jurisdictions. Dependent on what systems are used, this can become complex and hard to manage.

CDD best practices

To effectively comply with CDD regulations, it’s important that regulated entities adopt best practices and have a clear understanding of what measures will deliver the required results.

CDD Policy and procedures

The first step to creating an effective CDD framework is to develop an internal customer due diligence policy. This document(s) should outline the steps required for identification, verification, and ongoing monitoring. By developing this, all teams within the organisation will understand what’s required during the CDD process, how to use the tools available to them to achieve results and keep updated on the latest regulation and what risks to look out for.

Risk-based approach

Regulated entities are advised to take a risk-based approach to compliance and CDD. This means that verification and investigation measures should be tailored to the specific risks posed by different customers and transactions.

For example, if a customer attempting to onboard is identified as an ‘Ex-PEP’ (previously politically exposed persons), the business should take more caution with this customer and assign a higher risk group or more verification methods for them. This will ensure that higher risk customers are flagged for Enhanced Due Diligence (EDD) checks whilst keeping lower risk customers free of unnecessary checks.

Training and awareness

One of the most critical elements to CDD is training and awareness internally. Many global corporations are operating with thousands of compliance employees who need to be educated on the latest regulations, fraud tactics, and how to ensure business security by using the latest guidance from regulatory bodies.

Technology and automation

With increased risk and developing fraud and money laundering tactics, CDD technology and automation has emerged as an effective best practice to stay on top of requirements. These systems will often aggregate multiple sources of data and compliance checks into a centralised system & will come equipped with audit-proof storage of data and reporting tools.

How automation can help with CDD regulation

As CDD regulation continues to become more complex alongside fraud and money laundering being more difficult to detect manually, automation (otherwise known as RegTech) has emerged as a key method to assist in the due diligence process.

By implementing an automated CDD platform, regulated entities can benefit from multiple efficiency improvements and begin to use account opening as a driver of growth and not a blocker to new customers.

Automation can significantly enhanced CDD processes by:

1. Streamlining data collection: Automated systems can efficiently gather and process large volumes of KYC, AML, and anti-fraud data from several data sources.

2. Reducing errors: Automation minimises the risk of human error in data entry and verification processes, ensuring that CRMs are enriched with correct and in-depth customer data.

3. Enhancing efficiency: Automated CDD systems can analyse customer information in real time, identifying potential risks and allowing for faster decision-making.

4. Ensuring compliance: Automated CDD can be regularly updated to align with the latest regulatory guidance, ensuring continuous compliance and keeping ahead of emerging risks.

How FullCircl can help

FullCircl works with 700+ regulated entities including 7 out of the top 10 UK banks to support CDD regulatory adherence and craft great customer onboarding experiences.

Our IDV platform includes access to global KYC, AML, KYC, document verification, and anti-fraud solutions, using data from 20+ global data sources. FullCircl is data agnostic so customers can choose the data sources that fit their specific use case.

Ready to learn more about how we can help with simplified, standard, and enhanced due diligence money laundering regulations? Contact us here for a free demonstration.

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