What is Customer Due Diligence | What is Risk-Based Approach | CDD Documentation - AML/KYC Tutorial

Summary

This video script delves into the concept of Customer Due Diligence (CDD), a crucial process for companies to assess and mitigate risks associated with new or existing customers. It explains the importance of CDD in preventing financial institutions from being exploited for money laundering and terrorist financing, as recommended by the Financial Action Task Force. The script outlines key steps in CDD, including verifying customer identity, identifying beneficial owners, understanding business purpose, and ongoing due diligence. It also emphasizes the significance of a risk-based approach and the types of documentation typically required.

Takeaways

• 📚 Acronyms like KYC, AML are commonly used in the industry to refer to Know Your Customer and Anti-Money Laundering regulations.
• 🌐 The video aims to enhance viewers' understanding of AML and Customer Due Diligence (CDD).
• 🔍 CDD is the process of gathering information on customers to assess the risks of doing business with them.
• 🛡️ CDD is carried out to protect financial institutions from being used for money laundering and terrorist financing.
• 📈 The Financial Action Task Force (FATF) sets guidelines for CDD, including identifying and verifying customer identities and beneficial ownership.
• 🏦 Financial institutions are required to perform CDD when establishing business relations or conducting transactions over a certain threshold.
• 🔑 Key measures for CDD include verifying customer identity, identifying beneficial owners, understanding the business relationship, and ongoing due diligence.
• 📋 Documentation for CDD may vary but often includes identity documents, proof of address, and information on beneficial ownership and business activities.
• 📉 A risk-based approach tailors the level of due diligence to the risk presented by the customer, allowing for more or less scrutiny as necessary.
• 🏷️ Understanding the customer's products and services is crucial for assessing eligibility and risk appetite.
• 🔄 Ongoing due diligence is essential to ensure that transactions are consistent with the customer's profile and the institution's knowledge of them.

Q & A

What is an acronym and why are they popular in certain industries?

An acronym is a word formed from the initial letters or groups of letters of words in a name or phrase, often used for brevity in technical or specialized fields. They are popular in industries like finance and compliance because they help to quickly communicate complex concepts or standards, such as AML for Anti-Money Laundering.

What does KYC stand for and what is its purpose?

KYC stands for 'Know Your Customer.' It is a process used by financial institutions to verify the identity of their clients to prevent fraud, money laundering, and terrorist financing.

What is Customer Due Diligence (CDD) and why is it important?

Customer Due Diligence (CDD) is the process by which companies gather sufficient information about a new or existing customer to assess the risks of doing business with them. It is important to protect financial institutions from being used for money laundering and terrorist financing purposes.

When is CDD required according to the script?

CDD is required when establishing business relations, carrying out occasional transactions involving amounts over a certain threshold, dealing with entities in high-risk foreign countries, or when there is a suspicion of money laundering or terrorist financing.

What does the Financial Action Task Force (FATF) recommend regarding CDD?

The FATF recommends in Recommendation 10 that financial institutions should take measures to determine they know who their client is before entering into a business relationship, which includes identifying the customer, verifying their identity, and understanding the ownership and control structure of the customer.

What is the purpose of a risk-based approach in CDD?

A risk-based approach in CDD allows companies to identify, assess, and understand the money laundering and terrorist financing risks associated with their customers. It enables them to adjust the level of due diligence required in line with the risk presented by the customer.

What are the key components of CDD requirements mentioned in the script?

The key components of CDD requirements are identifying the customer's identity, beneficial ownership, and the products and services provided by the customer.

What types of documents are commonly used to verify customer identity in CDD?

Commonly used documents for verifying customer identity include certificates of incorporation, articles of memorandum, registration and business address, full name, photographic ID, address, and birth certification for individuals.

How does a financial institution determine beneficial ownership for CDD purposes?

Beneficial ownership information should be determined in line with the risk presented by the customer. Higher risk customers may require a 10% beneficial ownership threshold, while low or medium risk customers may require a 25% threshold.

What documentation can be used to understand the products and services offered by a customer?

Documentation such as articles of memorandum or association, annual reports, and information from local registries highlighting SIC or NAICS codes can be used to understand the products and services offered by a customer.

Why is ongoing due diligence important in the context of CDD?

Ongoing due diligence is important to ensure that the transactions conducted throughout the business relationship are consistent with the institution's knowledge of the customer, their business, and risk profile, including the source of funds.

Outlines

00:00

🔍 Understanding Customer Due Diligence (CDD)

This paragraph introduces the concept of Customer Due Diligence (CDD) and its importance in the financial industry. It explains that CDD involves gathering information about new or existing customers to assess the risks associated with doing business with them. The process is crucial for financial institutions to protect themselves from being used for money laundering or terrorist financing. The paragraph also outlines the regulatory obligations behind CDD, as stipulated by the Financial Action Task Force (FATF), which includes verifying customer identity, identifying beneficial owners, understanding the business relationship, and conducting ongoing due diligence. The video encourages viewers to subscribe for more content and suggests leaving comments for future topic suggestions.

05:02

📚 Key Components and Documentation for CDD

The second paragraph delves into the specifics of what Customer Due Diligence entails, including the identification of the customer, beneficial ownership, and the products and services provided. It discusses the risk-based approach to CDD, where the level of due diligence is adjusted according to the perceived risk of the customer. The paragraph emphasizes the importance of evaluating each customer individually rather than applying a blanket policy. It also highlights the types of documentation that might be required for CDD, such as certificates of incorporation, articles of memorandum, registration details, and identification documents for individuals. Additionally, it touches on the need to understand the customer's business activities and the relevance of this information to the financial institution's risk appetite.

Keywords

💡Acronym

An acronym is a word formed from the initial letters of a name or phrase, often used in professional or technical contexts to abbreviate terms. In the video, acronyms like 'ABC', 'KYC', and 'AML' are mentioned to illustrate the prevalence of such abbreviations in the industry, emphasizing the importance of understanding their meanings for those outside the field.

💡KYC Lookup

KYC stands for 'Know Your Customer,' which is a process used by financial institutions to verify the identity of their clients to prevent fraud and money laundering. The term 'KYC Lookup' in the script refers to the video series that aims to educate viewers on KYC and related topics, such as AML (Anti-Money Laundering).

💡AML

AML stands for 'Anti-Money Laundering,' which refers to the policies, regulations, and procedures put in place to prevent the process of generating income from illegal activities. The video discusses AML in the context of customer due diligence (CDD), which is a critical component in the fight against money laundering.

💡Customer Due Diligence (CDD)

Customer Due Diligence, or CDD, is the process of collecting and verifying information about a customer to assess the risks associated with establishing a business relationship. The script explains that CDD is required to protect financial institutions from being used for money laundering or terrorist financing, and it is a key part of the video's theme.

💡Financial Action Task Force (FATF)

The Financial Action Task Force is an international organization that sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the financial system. The script mentions FATF's recommendation 10, which outlines the regulatory obligations behind CDD.

💡Beneficial Owner

A beneficial owner is the natural person who ultimately owns or controls a customer entity. The script emphasizes the importance of identifying and verifying the identity of the beneficial owner as part of the CDD process, to ensure that financial institutions have a clear understanding of who they are dealing with.

💡Risk-Based Approach

A risk-based approach in the context of the video refers to the strategy of identifying, assessing, and understanding the money laundering and terrorist financing risks associated with each customer. This approach allows companies to adjust the level of due diligence required based on the risk presented by the customer, which is a central concept in the video's discussion of CDD.

💡Ongoing Due Diligence

Ongoing due diligence is the continuous monitoring of a business relationship to ensure that the transactions being conducted are consistent with the institution's knowledge of the customer and their risk profile. The script mentions this as part of the CDD requirements, highlighting the importance of ongoing monitoring beyond the initial customer verification.

💡Threshold

In the context of the video, a threshold refers to a specified amount or level that, when exceeded, triggers certain actions or requirements, such as enhanced due diligence. The script uses the term to describe the point at which higher-risk customers require more extensive beneficial ownership verification.

💡Documentation

Documentation in the script refers to the various records and papers used to verify customer identity, beneficial ownership, and the nature of products and services provided. Examples given in the script include certificates of incorporation, articles of memorandum, and registration details, which are essential for fulfilling CDD obligations.

💡Regulatory Obligations

Regulatory obligations are the legal requirements that financial institutions must adhere to, as set forth by regulatory bodies like the FATF. The script discusses these obligations in the context of CDD, emphasizing that financial institutions must take measures to know their customers and understand the nature of their business relationships.

Highlights

Acronyms like AML, KYC, and ABC are commonly used in the industry but may be confusing to outsiders.

The video aims to enhance knowledge in the fight against money laundering through AML-related content.

Customer Due Diligence (CDD) is the process of gathering information on customers to assess business risks.

CDD is required to protect financial institutions from being used for money laundering or terrorist financing.

Local laws and the Financial Action Task Force (FATF) recommend CDD measures for new and existing business relationships.

CDD involves identifying the customer, verifying their identity, and understanding the ownership and control structure.

Financial institutions must be satisfied that they know who their client is before entering into a business relationship.

Ongoing due diligence is necessary to ensure transactions are consistent with the customer's profile and risk.

A risk-based approach allows companies to adjust the level of due diligence according to the customer's risk.

Documentation for CDD varies based on entity type, jurisdiction, and customer risk rating.

Examples of documents for customer identity verification include certificates of incorporation and photographic IDs.

Beneficial ownership information should be determined based on the risk presented by the customer.

Understanding the customer's products and services is key to assessing eligibility and risk appetite.

Documentation such as articles of memorandum or association can confirm the customer's products and services.

The video provides a basic introduction to CDD, its requirements, and commonly used documents.

Viewers are encouraged to share their interpretation of customer due diligence in the comments section.

The video concludes with a reminder to like, subscribe, and watch more for further insights.

Transcripts

in the world that we live in today

everyone likes an acronym

whether it's abc kyc or aml

but what do they mean to people outside

of the industry

hello and welcome to another kyc lookup

video

where we bring you aml related content

to help you

enhance your knowledge in the fight

against money laundering

today we are going to explain what is a

customer due diligence

when is it required and what are the

most commonly used documents

but before diving into today's video be

sure to subscribe

so you don't miss out on any future

videos oh

and don't forget to leave us a comment

with any suggested topics you would like

us to cover in the future

so what is customer due diligence

customer due diligence or cdd as it is

also known as

is the process and procedures companies

follow to gather sufficient information

on a new customer or existing customer

and to assess the risks of doing

business with them whether it's at the

start of the relationship

or once established why do we carry

out the customer due diligence cdd

is carried out to protect the financial

institution

entering the new relationship being used

directly

or indirectly for money laundering and

terrorist financing purposes

it is also set out in local law

following the recommendations of the

financial action task force

that customer due diligence measures

should be undertaken when

establishing business relations carrying

out occasional transactions

these might involve amounts of money

over a certain threshold

or entities in high risk foreign

countries there is a suspicion of money

laundering or terrorist financing

or the financial institution has doubts

about the vericity

and adequacy of the previously obtained

customer identification

data what are the regulatory obligations

behind cdd

as the financial action task force

highlights in recommendation 10

financial institutions are required to

take enough measure

to determine they are comfortable and

satisfied that they know

who their client is before entering into

a business relationship

in order to satisfy this recommendation

financial institutions should take the

following measures

identifying the customer and verifying

that the customer's

identity using reliable independent

source documents

data or information identifying the

beneficial owner

and taking responsible measures to

verify the identity of the beneficial

owner

such that the financial institution is

satisfied that it knows who the

beneficial owner is

for legal persons and arrangements this

should include financial institutions

understanding the ownership and control

structure of the customer

understanding and as appropriate

obtaining information on the purpose and

intended nature of the business

relationship

conducting ongoing due diligence on the

business relationship

and scrutiny of transactions undertaken

throughout the course of the

relationship

to ensure that the transactions being

conducted are consistent with the

institutions knowledge of the customer

their business and risk profile

including where necessary

the source of funds what is a risk-based

approach

and when does it apply a risk-based

approach means companies should identify

assess and understand the money

laundering and terrorist financial risks

of their customer this is determined by

evaluating

each individual customer on their own

merit

and not using a rule-based approach

where all customers

are treated the same companies should

take into account

a risk-based approach at the time of

setting up their aml policy and

procedures

in order to have an effective foundation

for their anti-money laundering

and counter financing terrorism

programme most importantly

by having a risk-based approach

companies are able to adjust the level

of due diligence required in line

with the risk presented by the customer

what documentation do you need to carry

out the customer due diligence

although there is no set list of

documentation or information required

as it varies based on the entity type

jurisdiction of where the company is

registered in

or being serviced from as well as the

risk rating given to the customer

however we can look at the key

components we need to look out for

customer identity beneficial ownership

products and services provided some of

the documentation used to cover customer

identity could be

certificate of incorporation articles of

memorandum

registration and business address if the

customer is an individual

information such as full name

photographic id address and birth

certification would be required

beneficial ownership information should

be determined in line with the risk

presented by the customer

meaning the higher the risk lower the

threshold

for example a higher risk customer

should require a 10

beneficial ownership whereas a low or

medium risk customer

may require a 25 threshold

documentation used to determine the

ownership can be

ownership structure share registry

annual report in the scenario where the

customer doesn't have ultimate

beneficial owners meeting the threshold

it will require to identify the most

senior controlling party

with the day-to-day control of the

company the last key component of

understanding the product and services

offered by the customer

this information is key in order to

understand if the customer is eligible

to accept it as your client

or to understand if it fits with your

risk appetite

documentation used to confirm this item

can be

articles of memorandum or association

annual report may highlight this

information

local registries will highlight sic

or the naics code

okay let's recap so what is customer due

diligence

customer due diligence or cdd as it is

also known as

is the process and procedures companies

follow to gather sufficient information

on a new customer

or existing customer and to assess the

risks of doing business with them

whether it's at the start of the

relationship or once established

where does the cdd requirement originate

from

financial action task force highlights

in recommendation 10

financial institutions are required to

take enough measure to determine they

are comfortable

and satisfied that they know who the

client is

before entering into a business

relationship

the key components of the cdd

requirements are to identify the

customer identity beneficial ownership

and products and services provided

well there you have it a basic

introduction to what is customer due

diligence

when is it required and whether the most

commonly used documents

please tell us in the comments section

what is your interpretation of customer

due diligence

thank you for watching the video and if

you made it this far

don't forget to like and subscribe to

watch more amazing videos