The Complete Guide To Understanding Customer Due Diligence

Customer Due Diligence (CDD) is not on top of most people’s list of fun things to do, but it has become an essential part of daily working life for those of us who need to verify customer’s identity and/or source of wealth and/or funds.

Here at the TIC Company we have carried out thousands of identity verifications and use our AMLOnline portal to make life easier, but even with great technology to help us it is important to understand the different types of customer due diligence and how and when to carry them out.

Here we dive into the five different types of customer due diligence and what it means for businesses.

What is customer due diligence?

To put it simply, customer due diligence - sometimes also called know your customer (KYC) - is the process of collecting customer data to ensure customers are who they say they are, and to determine the level of risk they may present to your business. Identifying data can include official documents with the customers name and photograph which confirms their identity, birth date and residential address.

There are two ways of carrying out identity verification:

  1. Documentary verification

  2. Electronic verification

Verification of address can be done using documents, data or information issued by a reliable and independent source.

When is customer due diligence required?

CDD is required when a business which is bound by AML regulations starts a business relationship with a customer or a potential customer, or their relationship with an existing customer ‘materially changes’ and they need to verify customer identity and risk profile.

The Financial Action Task Force (FATF) advise customer due diligence should be carried out when:

  • establishing business relations;

  • carrying out occasional transactions: (i) above the applicable designated threshold which is currently $10,000; or (ii) that are wire transfers in the circumstances covered by the Interpretative Note to Special Recommendation VII;

  • there is a suspicion of money laundering or terrorist financing;

  • you have doubts about the veracity or adequacy of previously obtained customer identification data.

For many businesses dealing with financial transactions this means carrying out due diligence checks on hundreds of customers every year. And CDD checks are not just restricted to the actual customer but also other people who are associated with your customer.

Who do businesses need to include in their due diligence process?

In many cases you will not only need to carry out customer due diligence on your client but will also need to include:

  • any beneficial owner of a client (the person who ultimately controls the customer); and

  • any person acting on behalf of a client (the person operating or transacting on an account or facility that is held by your customer).

The reason for these inclusions is so that you can verify identities and relationships associated with your customer as well as form a better understanding of the level of money laundering and terrorist financing risk associated with your customer.

This can all seem a bit daunting and time consuming when you have a million tasks to get through each day but compliance is essential to ensure you comply with the AML/CFT Act. Not doing so can have serious financial consequences for your business. In May 2021 we saw the Reserve Bank file legal action against TSB for breaches of the AML/CFT Act which has resulted in TSB agreeing to pay $3.85 million in penalties.

Having a compliance officer in your business who understands what needs to be done to comply with regulations and/or working with a reputable AML company can help you stay on track and guide you through AML audits as well as ensuring you are following the right customer due diligence processes.