Customer Due Diligence for Banks – Benefits and Use-cases to combat Money laundering

For the prevention of money laundering, professionals of compliances are taking vital steps worldwide. Financial scams like money laundering are getting common with the advancement of the age, for the avoidance of such regulations, customer due diligence for banking is practiced. These fraud cases accumulate because of the pandemic where businesses are working online and scammers can conveniently do identity theft.

Why is CDD Significant for Banks?

CDD is used for the identification of clients who are a risk to the organization. The manual method of identification lacks AML compliance which raises the chance of human errors and takes more time in proceedings. When the AML program is poor, financial institutions can not ignore it, and that’s the ideal time to use customer due diligence for banking, otherwise, financial firms can face penalties and lose their reputation. Client due diligence is playing its mandatory role and the one that is directly helpful for the know your customer (KYC) and anti-money laundering (AML) initiatives. It is established to assist financial sectors and banks to examine their customers and to distinguish that the individual is not in any PEPs list.  

Customer due diligence for banking examines the users and verifies their genuineness. The institutions properly observe that their system should be risk-free before the enrollment of any person. It is like the credentials of the users are matched against those official verification documents which will authenticate their identity.

Process of KYC Due Diligence 

The customer due diligence is performed to verifies the identity of customers, the initials steps include information such as;

  • The complete name of clients
  • Residential address of customers
  • The email address and the contact number
  • Place and the date of birth of a client
  • A government-approved ID number  

If a person is a business entity there are some more further information to be checked such as;

  • Name of corporation
  • Type of business
  • Ultimate beneficial owners
  • Credentials related to the shareholder and the senior managers  

Types of Due Diligence Financial Services in Banks

There are three types of due diligence that are used in banks for the verification of the customers given below; 

Standard Due Diligence

This due diligence mechanism is used in banks for verification, as it is the first step of verification in which a client is verified through knowing your customer (KYC). In this step, clients are verified by examining personal credentials like government-improved identity cards. It is performed to show the intended reason for business partnerships if large transactions are performed and to observe the criminal activities.

Simplified Due Diligence 

This due diligence in banking is considered for less or no financial crimes such as the clients who are less risky can be identified easily through ID documents. 

Enhanced Due Diligence 

Enhanced due diligence is practiced when the chances of money laundering, corruption, and terror financing are high alert. It identifies the high-risk clients and their further investigation is performed. Enhanced due diligence confirmed that the assets and funds are analyzed to eliminate the risk of crimes and penalties. Here every individual is scanned against Politically exposed persons (PEPs) lists, and government exposed blacklists.

Beneficial Ownership a Crime

Financial institutions need to verify the beneficial owners of the assets and the accounts because it is important, as clients that come for enrollment might be acting and showing that they are the same person while doing transactions. This fraud is not acceptable for any organization as it can give rise to fraud cases. This transactional behavior is reflected because the beneficial ownership needs to hide its identity. Enhanced due diligence EDD banking needs to develop the ownership of organization and partnership. Customer due diligence for banks is an enhanced way to ensure the identity of customers and removes the doubts that the entity is not a danger for the institution. A cautionary act like this can prevent all systems from money laundering. 

Benefits in Industries

Customer Due diligence program is used in many institutions to scan the entities who are not beneficial for their organizations such as;

  • Healthcare departments
  • Legal institutions
  • E-commerce stores
  • Real estate businesses
  • Insurance industries
  • Travel industries
  • Banking institutions 

In a nutshell 

In a nutshell, it is assumed that customer due diligence for banks is an efficient way of verification of the clients to secure the organizations from the risks of money laundering and identity thefts. Mainly, it helps to capture the beneficial owners and secure the financial institutes from them.


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