Financial institutions are considered a hot spot for money launderers and cybercriminals to commit online financial frauds. Money laundering is a growing concern for all countries around the world as every country has some black sheep that not only spoils the image of the country but is also responsible for economic deprivation. Besides money launderers, fraudsters are also there to commit online ID thefts. Bad actors hack the accounts of the customers and then utilize them for illegal use and perform fake transactions that harm them financially.
Most of the financial frauds are committed due to substandard KYC/AML procedures employed by businesses or not giving importance to KYC AML compliance. In 2021, financial frauds are expected to reach $721.3 billion as per the report of the Insurance Information Institute. By incorporating robust KYC checks, firms can avoid financial fraud. Among financial institutes, banks are at the top in non-compliance fines and also a hot spot for fraudsters due to the number of online transactions per day. Financial organizations, especially banks, need to employ stringent customer due diligence processes to avoid hefty fines and other online frauds.
Table of Contents
Knowing your customer is an obligatory requirement for all businesses especially for those operating in the online space. It helps to confirm the customer’s identity before onboarding using various authenticity checks to ensure legitimacy. If we talk about financial institutes, they must comply with KYC standards. The United Kingdom lost 150 billion GBP in 2019 in remote banking frauds. If the situation is going on, it becomes difficult for banks to survive in the market as a profitable enterprise. KYC compliance seems inevitable for banks as it helps to reduce financial crimes. Let’s have a look at how customer due diligence and enhanced due diligence assist financial enterprises to avoid crimes.
Customer due diligence is considered the heart of AML and KYC compliance. CDD is the act of running background checks on the customers to make sure that the customer is properly assessed before onboarding or not. AML customer due diligence helps banks to identify politically exposed persons or customers having a bad financial record to avoid frauds in the future.
Due diligence in banking also helps banks to meet security regulations directed by Financial Action Task Force (FATF) and other global regulators. Online KYC compliance not only facilitates banks to authenticate their customers in real-time but also helps them to update their laws and regulations according to the current situation. It also helps them to establish a trustworthy B2C relationship that enhances the customer experience.
Standard Due diligence
Whenever a customer visits the bank to perform any activity, standard due diligence is performed to check his legitimacy. It is the primary stage of confirming the identity of the customer through KYC practices. SDD is performed by the compliance officer to know the purpose of the transaction.
Simplified Due Diligence
SDD is performed on those customers which belong to the areas where the risk of financial crimes is low or no risk. It can be done simply by authenticating the customers through their ID documents.
Enhanced Due Diligence
EDD is performed by banks on those customers who are related to high-risk areas where the chances of financial crimes are high such as money laundering, corruption, tax evasion, etc. The suspicious customers can be asked for further verification to authenticate them. In enhanced due diligence, the identity of the customers is verified by matching their financial records against global watchlists, PEP’s lists, and blacklists to ensure that the customers are not involved in any financial crime in the past.
Besides KYC in banking, ongoing customer monitoring also helps financial enterprises to keep a regular check on their existing customers and the regular transactions they perform. Ongoing monitoring assists banks to maintain and update the risk profiles to enhance conversion rates.
Financial institutes are under immense pressure to comply with financial regulations as online financial frauds are increasing day by day. Customer due diligence for banks helps them to ensure that the onboarded person is actually who he claims to be. It also helps firms to establish a good B2C and B2B relationship. Digital ID verification solutions prove to be a helping hand for businesses to perform customer due diligence within seconds that add up their integrity. Customer due diligence for banks also assists them to meet stringent security standards to avoid penalties.