Financial institutions worldwide are grappling with increasingly stringent regulations, driven by sophisticated financial crimes and evolving geopolitical situations. Although fines towards non-compliance of Anti-Money Laundering (AML) regulations in 2024 decreased by 30% to $4.6 billion as compared to the previous year, the figure remains concerning. In a highly competitive environment, financial institutions must ensure their customer onboarding is diligent to mitigate financial crime compliance (FCC) risks.
Enter Customer Due Diligence (CDD) — a strategic risk shield that allows financial institutions to maintain their competitive edge. It goes beyond Know Your Customer (KYC) by thoroughly vetting customer profiles. The Financial Action Task Force (FATF) recommendations for International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation have a section on how countries can implement CDD effectively. Let’s delve a little deeper into what CDD means for financial institutions in today’s context.
CDD is the process used by financial institutions to assess their prospective customers, risk mitigation being a significantly huge part of it. The process includes verifying customers through requisite background checks and ensuring their profile meets all mandated prerequisite checklists. It also thoroughly screens customer profiles to mitigate any risks associated with money laundering, terrorism funding or human and drug trafficking. It helps these institutions comply with AML and Counter-Terrorism Financing (CTF) regulations. Compliance establishes the authenticity and legitimacy of the customers in order to help curb fines. Additionally, it builds trust and integrity, two key factors that reinforce an ethical reputation with all stakeholders. In a high-stakes, complex environment where there’s no room for errors, CDD equips modern financial institutions with the agility needed to respond swiftly to criminal threats, leveraging a combination of advanced technology and strategic foresight.
Robust CDD processes also help banks and financial institutions reduce operational costs and insurance premiums. Apart from fines, legal cases, investigations and remediation efforts drain resources considerably. In the long run, CDD aids financial institutions to build the right customer base and enhance their customer relationships.
CDD works as part of the broader KYC obligations, helping build a risk management framework that also evolves with time. Here’s a sneak peek into this aspect of CDD.
Risk management is a core CDD value proposition, with every customer assigned a risk profile. A risk-based approach segments customers into various brackets like low, medium and high. This assessment considers diverse factors, including geography, industry, transaction patterns and media scrutiny to determine customer risk profiles. The risk profile will determine the appropriate CDD process. It’s not a one-size-fits-all approach and adapts dynamically, which is why it becomes more reliable. Here are the three levels of CDD.
Simplified Due Diligence: This CDD level is for low-risk customers with a predictable nature of transactions. For example, a salaried individual with regular deposits falls under this risk category.
Standard Due Diligence: This level involves basic scrutiny of the customer information, including identity verification and risk profiling. It applies to a majority of the customers with risk profiles in the low to medium range.
Enhanced Due Diligence: This level of CDD is generally applied to high-risk customers who present an increased risk of involvement in financial crimes, including individuals classified as Politically Exposed Persons (PEPs). In such cases, additional customer information is gathered to conduct comprehensive background checks. The information collected includes details like the source of funds, wealth history, ultimate beneficial ownership and the nature of the transactions among other relevant data. A company with frequent large cross-border transactions may elicit enhanced due diligence.
The CDD framework also incorporates ongoing monitoring, which continuously tracks account activities and transactions of all customers, regardless of their risk profile. This process helps keep customer risk profiles up to date and initiates necessary investigations as part of a perpetual KYC strategy. It also ensures optimal use of resources by focusing on high-risk accounts. Artificial Intelligence (AI) algorithms power modern CDD systems to flag anomalies for thorough investigations, with reduced false positives to increase accuracy. The process also helps in filing precise Suspicious Activity Reports (SAR) to enhance compliance and prevent fines. Such a level of swift scrutiny helps disrupt criminal networks before they cause harm, proactively meeting anti money launderinggoals.
In today’s complex and ever-changing geopolitical landscape, the financial industry remains on high alert as criminals increasingly exploit advanced technologies to sharpen their tactics and expand their reach. Future-ready financial institutions and banks will deploy robust and modern AI-powered CDD systems as a strategic asset to predict and prevent financial crime, earn stakeholders’ trust and build their integrity through an ethical and transparent compliance framework.
how can Infosys BPM help?
Infosys BPM’s Financial Crime Compliance offerings span over 50 global clients with 36 global delivery centres covering more than 9 million transactions per year. Our holistic approach combines advanced technology with expert advisory services to address key customer challenges through our anti-financial crime platform and FCC-as-a-service with tangible cost benefits and enhanced, measurable operational efficiencies.
