Did you know that in 2023, the ratio of global fines for anti-money laundering breaches exceeded the figure of $10 billion? Almost 90% of the financial institutions all over the world have said that they struggled with the process of implementing the effective features of customer due diligence practices. It is getting impossible to overstate the need for repetitive due diligence procedures as the given percentage has exceeded more than $300 billion in illegal funds annually. Money laundering features like Enhanced Due Diligence (EDD) and Customer Due Diligence (CDD) are two essential components that are supposed to address an effective AML compliance system.
What Is Customer Due Diligence (CDD)?
Customer due diligence, or CDD, can be described as the process of verifying a customer's identity and assessing the risks they might pose as per their profile. It is quite understood that this feature is one of the required initial steps in the overall anti money laundering framework that facilitates the ability of financial institutions to verify who they are truly working with.
Important Elements of CDD:
Identity Verification: The process of retrieving and verifying client information like name, address, and identification documents, can be described as an identity verification process.
Risk Assessment: The process of figuring out a particular risk level of a client with respect to its profile's factors that further include their business kind, transaction history, and place of origin is known as risk assessment process.
Continuous Monitoring: The technique of keeping an eye on the customer behavior in the context of financial activities with the intentions to identify any dubious transactions or actions is known as continuous monitoring process.
What is CDD in Banking?
Banking sector can take help from the features of CDD so they can avoid financial crimes by demonstrating the validity of their clients through a compliance framework. Banks are supposed to carry out a thorough customer due diligence process like verifying that a new customer or business is not involved in unlawful activity when they open an account.
What Is Enhanced Due Diligence (EDD)?
Every customer is supposed to get through the check of CDD and feature of simultaneously Enhanced Due Diligence (EDD) goes one step farther. It usually gets utilized when a client has a higher danger of financial crimes, such money laundering and financing terrorism while he is employed. In the context of anti money laundering, EDD's primary objective is supposed to gain a deeper understanding of the customer's behavior and funding sources.
Important Elements of EDD:
Detailed Risk Analysis: The method of enhanced due diligence is supposed to provide a more thorough and in depth risk assessment to high risk clientele or organization which can actually benefit the overall financial system as well.
Source of Funds Verification: enhanced due diligence is supposed to verify the source of wealth or asset of a customer which ultimately aids in making sure they weren't obtained through any illegal means, such procedure is considered as source of funds verification as well.
What is EDD in Banking?
When it comes to working with high risk clients in the banking sector like politically exposed persons (PEPs), clients from high risk areas, or those involved in complex corporate structures, the feature of enhanced due diligence becomes compulsory to make sure compliance checks are followed.
Write some Real-World Examples of EDD and CDD in Action?
ING Netherlands' Compliance Overhaul
In 2018, Dutch financial regulators found that ING Netherlands had failed to prevent money laundering for years, and the company was fined €775 million as a result of this negligence. Further investigation helped in revealing the reason that ING did not follow the guidelines of AML compliance which were the basic procedures like CDD and EDD. This negligence resulted in inadequate monitoring and poor risk assessments. In response to this investigation, ING decided to increase its investment in compliance resources and training while strengthening its compliance department by putting automated transaction monitoring tools into place.
Swedbank’s AML Scandal
Due to serious shortcomings in its anti-money laundering system, Swedbank was fined by regulatory authorities for $386 million in 2020. Further investigation helped to determine that Swedbank had failed to properly implement enhanced due diligence and customer due diligence for clients involved in high risk transactions, particularly in its Baltic division. In order to ensure strict supervision of high risk clients, Swedbank has since made large investments in its AML procedures which further include updating its monitoring technologies and hiring more compliance personnel.
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