Customer due diligence or CDD and know your costumer or KYC, are the processes of performing background checks on business partners or customers to ensure they are not involved in criminal activities such as fraud and money laundering, which are a constant threat to financial organizations. But one might ask, ‘What are the similarities and differences between CDD and KYC?’. This article elaborates on the similarities and differences between CDD and KYC.
Similarities and Differences between CDD and KYC
Both CDD and KYC are designed to verify that an organization’s commercial operations are conducted solely with genuine people and customers, including individuals, businesses, and corporate entities. These also help guard organizations from criminal activities such as fraud, money laundering, and handling of criminal or terrorist property.
Both CDD and KYC are crucial aspects of AML compliance. Organizations should identify and verify anyone they work with to ensure they don’t become involved with a business or customer with a history of any financial crime.
When to Conduct CDD Versus KYC
CDD is a broader term that refers to the comprehensive evaluation of a client before onboarding and giving services to them. In contrast, KYC is a continuous process that occurs after the customer’s account has been opened and provided services. When there is a doubt regarding the accuracy of the customer’s information or profile, which was built based on customer information initially submitted to the company, the KYC procedure is initiated. Doubts may emerge due to unusual transactions or activity discovered in clients’ accounts. During the course of periodic account reviews, the compliance team or the account opening team may notice unusual activity and transactions.
As the CDD is a process performed by the organization to obtain the facts about a customer to assess the extent to which the customer exposes the organization to a range of money laundering or terrorist financing risks; therefore, KYC is performed by organizations to make the overall CDD process relevant, and reliable.
KYC supports the CDD process of complying with the requirements of relevant legislation and regulation and helps the firm. At the time the due diligence is carried out, to be reasonably certain that the customers are who they say they are and that it is appropriate to provide them with the products or services requested.
KYC can also guard against fraud, including impersonation and identity fraud, and help the organization identify what is unusual and enable the unusual to be examined during a continuing relationship. If unusual events do not have a commercial or otherwise straightforward rationale, they may involve money laundering, fraud, or handling the criminal or terrorist property.
How can CDD and KYC be of Help to Authorities?
KYC can enable the organization to assist law enforcement by providing information on customers being investigated following a suspicion report to the financial intelligence unit (FIU).
Organizations must, however, be able to demonstrate to the supervising authorities that the extent of the measures is appropriate to the perceived risks of money laundering and terrorist financing. The organization must apply the CDD measures if the person if KYC is part of the CDD measures, enabling the organization to know the credentials and background of the prospective customer. Organizations are required to perform the LYC process before onboarding the customer and later on at different stages, such as during the process of periodic compliance reviews or investigations.
Continuous Background Screening Checks in KYC
The KYC process protects an organization from being used for money laundering or terrorist financing activities, which the customer may perform after getting onboarded by the organization, such as a financial institution. KYC enables the organization to avoid the risk of onboarding such customers who are criminals, such as money launderers or related to some criminals in any other manner. Onboarding criminals causes the entity to face reputational losses and imposition of penalties from the regulator. The KYC process is a mandatory process that is followed when the customer contacts the organization either physically or through online portals.
The KYC regulatory requirements help detect the risk of suspicious intentions and transactions very early, which may be the stage before onboarding the customer and providing the services. KYC is the procedure of customer identification and verifying that they are who they claim to be. It involves understanding a customer’s identity, financial activity, and the risk they face.
In the broader sense, the KYC process includes identifying the client using the initial documents they provided, identifying the true beneficial owner of the customer, and taking appropriate measures to verify their identification.
For example, if the beneficial owner is a legal person, trust, company, foundation, or similar legal arrangement, the organizations are required to take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation, or similar legal arrangement. Understanding the objective of opening the account or establishing the relationship.
Although similar, there is a fine line between CDD and KYC. The best definition is CDD is a broader term that refers to the comprehensive evaluation of a client before onboarding and giving services to them. On the other hand, KYC is a continuous process that occurs after the customer’s account has been opened and provided services.