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As it has been mentioned in the FATF report, the significance of customer due diligence (CDD) for financial institutions must not be underestimated. With the help of a reliable and consistent array of elements, this system can prevent a company from engaging in business relationships with an unreliable or illegal partner. Among the most important CDD measures, such aspect as identifying the customer and verifying their identity with the help of reliable data is mentioned (FATF, International Standards 12). Other crucial factors to consider include determining the beneficial owner, understanding and collecting data, and performing ongoing due diligence (FATF, International Standards 12). The present report aims at explaining the major objectives of the effective CDD system and analyzing its components in detail.
Goals and Elements of the CDD System
The objectives and components of the CDD system are closely interrelated, there being four major types of them:
- Identifying the customer and confirming their identity by employing independent data or documents (FATF, International Standards 12). The purpose of this element is to make sure that the prospective customer is not engaged in any risky or illegal activities, such as money laundering or terrorist financing. Frequently, identity checks for such causes are performed by requiring a copy of the customer’s passport or proof of their address. However, there are more thorough options of identification, such as visiting customers at work or home (Clarke).
- Determining the beneficial owner and taking appropriate measures to confirm their identity (FATF, International Standards 12). The purpose of this CDD component is to find out who the ultimate owner or controller of the business is. The major underlying reason for such identification and verification is performing a valid risk assessment of the possible cooperation (Clarke). Such an approach is also beneficial for client acceptance procedures.
- Comprehending and collecting appropriately the data aimed at analyzing the nature of the business relationship (FATF, International Standards 12). Putting it in simpler terms, it is necessary to know what one intends to do for business partners and why (Clarke). In most cases, the character and the ultimate goal of the business relationship are apparent. Still, when some more complicated or uncommon tasks are involved, it is important to pay more attention to this element (Clarke).
- Administering continuous due diligence on the business relationship and inspection of transactions launched throughout the time of that relationship (FATF, International Standards 12). This component is aimed at making sure that all of the performed transactions correspond to the institution’s data on the customer, their risk profile, business reports, and if needed, the source of funding (FATF, International Standards 12).
Levels of CDD
There are three levels of CDD identified, each of which has a different complexity depending on the nature of business relationships and the level of trust to clients.
- Level 1: standard due diligence. This category is applied to all customers in general unless there is a need for either of the two other types (Clarke).
- Level 2: simplified due diligence. This type of CDD is employed when the degree of trust in the client is very high, and there is no need for performing the standard procedure (Clarke). Several categories allow selecting this CDD level:
- “credit or financial institutions subject to the provisions of the money laundering directive or equivalent overseas requirements”;
- firms belonging to the regulated European Economic Area market corresponding with the specified disclosure duties;
- certain public authorities in the European Union and European Economic Area (Clarke).
Thus, the conditions under which simplified due diligence can be implemented are limited. Moreover, even if this level of CDD is chosen, it is necessary to perform continuous monitoring of the client.
- Level 3: enhanced due diligence. This approach is used when there is an increased risk of the client’s engagement in terrorist financing or money laundering (Clarke). Also, there is a need for applying this CDD type when the identification of the client was not possible due to their absence. On such occasions, some additional activities should be undertaken to reinforce due diligence, such as collecting additional documents or performing a more thorough verification of clients’ data. Sometimes, it may be necessary to require a confirmatory certificate from a financial institution subject to the money laundering regulation (Clarke). Another reason for performing level three CDD is dealing with a politically exposed person due to their increased risk for potential engagement in corruption or bribery.
When to Undertake CDD Measures
Several occasions are requiring CDD measures to be taken:
- when starting business relations;
- when performing occasional transactions exceeding the applicable designated threshold, including cases when there is a single operation or several ones;
- when executing irregular transactions;
- in case of a suspicion of money laundering or terrorist financing;
- when there are doubts about the adequacy or reliability of the previously received information about the client (FATF, Methodology for Assessing 43).
Customer due diligence is a vital element of any important financial relationship. It is necessary to perform CDD before engaging in business connections with clients. The most relevant level of CDD in our case is enhanced due diligence. This measure will allow identifying any past mistakes and irregularities, thus letting us making sure that clients do not have any terrorist financing or money laundering history. Regular monitoring of the cooperation will increase the chances for positive business relations.
Clarke, Jeremy. “AML Awareness ― Customer Due Diligence.” ICAS. 2016. Web.
FATF. International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation. FATF, 2018.
—. Methodology for Assessing Technical Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems. FATF, 2018.