First, what is Know Your Customer (KYC)?
KYC is the base control procedure used by regulated institutions to identify both existing and potential customers, all designed to prevent associated risks. These procedures include a checklist that ensures that the organization has all the necessary information about their partners before onboarding them. The checklist also helps the organization to determine the customer’s risk level and under which level of interaction they should build this new work relationship.
In short, KYC involves the checks done on the customer to verify that he or she is really who they claim to be. KYC is a common practice in organizations and businesses that are mandated to comply with Anti-Money Laundering (AML) regulations or dealing with sensitive information.
By law, within the financial realm, it is mandatory for companies and organizations to conduct due diligence procedures before signing up new customers. However, these procedures are traditionally slow, delayed or disputed leading to unnecessary friction, or even to bad business practices. This is where new methodologies come in handy and where Machine Learning can shine. Automating most of the procedure is key, as the human factor often adds more noise than solving issues.
And now, what is Customer Due Diligence (CDD)?
CDD refers to all the processes that institutions use to gather and evaluate information about their new customers. The goal of CDD is to provide these organizations (mostly in finance) with information about the potential risks of doing business with specific individuals or organizations.
By applying CDD procedures, financial institutions can determine well in advance the risks they would be exposed to when dealing with potential customers. Some risks are deemed acceptable, such as past financial hardships but some of these risks are showstoppers and include terrorist financing and money laundering crimes. Institutions which fail to comply with CDD standards and other trade sanctions attract hefty fines from regulators in the industry. Just this year, after a spate of scandals that caused hundreds of millions in losses and allowed criminals to abuse the financial system, UK regulators have instructed banks to improve trade finance oversight.
So how is KYC Different from CDD?
As fully integrated processes, KYC and CDD share a lot of similarities but there are a few differences between the two. For instance, KYC allows the business to determine a customer’s risk profile by acquiring all the necessary information before starting a relationship with the potential customer.
CDD, on the other hand, confirms if the information provided by the potential customer is correct or not. CDD basically involves background and utility ownership checks. In most regulated entities, past KYC procedures have been transformed into CDD programs.
Unlike KYC, CDD controls are done in a process and often involve ongoing communication with the customer. CDD procedures never stop, thus providing a continuous assurance framework that is commonly used by institutions that deal with many transactions on a daily basis, such as banks and real estate companies.
The institutions use advanced software programs specifically designed to monitor the movement of funds and identify red flags or suspicious transactions. Screena, for example, connects to your system and your datasets. Leveraging the most-performing algorithms, Screena starts by resolving relationships between identities and then matches them in real-time against industry-leading Risk Intelligence databases.
That is how CDD carries on the work initially started by KYC procedures. It is used to determine suspicious activities and where necessary end relationships with customers who engage in illegal transactions. CDD is an integral part of any AML program and should never be relegated to an afterthought.
It is critical for all well-functioning institutions to conduct regular checks including volume of transactions, amount of money transacted, and geographic distribution of funds.
CDD and KYC New Approach
Most of the antiquated AML controls have been rendered dysfunctional by frequent changes in regulations. This is also because traditional AML practices are no longer secure and could potentially be manipulated and pose high governance risks.
Screena provides advanced and updated name-matching solutions to different companies’ AML control problems. This approach makes it possible for companies to automate their AML identities checking processes, enabling a new approach to CDD and KYC. Indeed, Screena is designed to meet the new requirements of “Perpetual KYC” which provides continuous monitoring of customers with near real-time and event-driven customer identity reviews.
At the same time, controllers must also understand that no customer due diligence procedures are the same. That is why the choice of software should keep flexibility and customization at its core. Screena’s algorithm-as-a-service plugin solution ensures exactly that. With us, your business has a constant, always improving, always learning, customer screening solution.
Beyond efficacy, Screena also ensures efficiency and speed through delta screening running at defined intervals against always up-to-date data sets, all while guaranteeing that redundant matches do not occur.
Contact us today to learn more about Screena Due Diligence procedures and technologies. Our AI consultants will be more than happy to provide advice on how to embed our solution in your CDD / KYC processes.