There are two terms that are frequently used in the banking sector, KYC and CDD. Many think they are the same, but they are actually different. We plan on educating you about these two related but different terms through this blog.

What is CDD (Customer Due Diligence)?

Customer Due Diligence (CDD) refers to the act of collecting identifying information by a financial institution to verify a customer’s identity and assess the level of criminal risk.

Listed below are the important steps involved in CDD:

Identification and verification of the customer

To identify customers, banks must obtain personal information, such as name, a photographic identification document (ID), birth certificate, and address. This is done to ensure that the customer is not using a fake identity to access the bank’s services.

Identification of the beneficial owner in the case of legal matters

Quite often banks need to evaluate an entire company rather than a single individual. This is when due diligence measures check the company’s beneficial ownership. It is done for determining the control structure of the company.

Understanding the purpose and the intended nature of the business relationship

Banks obtain information related to the nature of a specific business relationship and its purpose.

Conducting ongoing monitoring of the business relationship

CDD is not a one-time obligation. Banks perform CDD periodically throughout a business relationship in order to ensure that customers’ transactions are consistent with their established risk profile.

When is CDD required?

New business relationship

Before entering a business relationship, banks must perform a CDD check to ensure that their customer is not using a fake identity and matches the desired risk profile.

Occasional Transactions

There are some transactions that warrant CDD measures on an occasional basis. For example, transactions involving money exceeding a certain threshold or transactions with entities located in high-risk foreign countries.

Money laundering suspicion

Banks must perform CDD checks when suspecting a customer of financing terrorism or laundering money.

Unreliable documentation

Banks must take CDD measures when customers provide inadequate or unreliable documentation.

What is KYC (Know Your Customer)?

“KYC” refers to the initial identification and verification measures taken by a financial institution while opening an account. Banks may refuse to open an account or halt a business relationship if the customer fails to meet minimum KYC requirements. This onboarding processes help prevent and identify money laundering, terrorism financing, and various illegal corruption schemes. It includes ID card verification, face verification, document verification such as utility bills as proof of address, and biometric verification.

Few common KYC verification processes include:

Identity verification

Real-time verification across national databases and government data sources.

Document verification

Verifying driver’s licenses, passports and other government-issued IDs for ruling out identity frauds.

Watchlist screening

Checks against local and global sanctions, OFAC and politically exposed persons list.

Fraud screening

Identifying suspicious activity and risky behavior patterns using scorecards and user-defined business rules to uncover identity fraud.

Device and behaviour profiling

Gathering information about device type, porting, and SIM cards, analyzing device fingerprints by combining GPS location, VPNs, and IP addresses, and preventing online fraud.

Multi-factor authentication

Using one-time passcode or knowledge-based authentication questions to enhance the KYC process.

Why is KYC essential?

Across the globe, banks are required to comply with laws and regulations concerning financial crimes.

KYC does not just relate to regulatory compliance, but it also benefits the organization as it is an important measure of risk management.

A good KYC policy or process will enable banks to better understand their customers and their financial practices, making it easier to assess, manage and mitigate risk.

KYC safeguards banks from fraud, money laundering, bribery, human rights violations, and other forms of corruption and financial crime.

By conducting thorough KYC checks, banks can minimize the financial, reputational, regulatory, and strategic risks from customers.

If you require any bank account opening assistance in the UAE, feel free to contact us at (+971) 529095829 or info@polestaradv.com for a free consultation. We are happy to provide you with a seamless experience.