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.