Customer due diligence (CDD) refers to the process that banks and other financial institutions use to verify the identity of their customers. This is essential for a range of reasons. However, the prime factor behind customer due diligence being a requirement for these institutions relates to the assessment of risk of engaging in financial crime. Customer due diligence is an essential part of financial crime prevention and is required by law in the United States.
CDD or customer due diligence involves the collection of customer information via a range of means including first person accounts as well as external ID verifiers. Companies have always struggled with this, owing to the efficiency of criminals’ ID theft skills.
In the digital age, however, customer due diligence has become even more challenging due to the rise of online fraud and the increased use of virtual currencies. These new technologies have made it easier for criminals to commit financial crimes. Furthermore, they have also made it more difficult for banks to verify the identity of their customers.
The Evolution of Customer Due Diligence in Banking
The challenges of customer due diligence in the digital age have been the prime leader leading us to the evolution of CDD practices. In recent years, banks have begun to use new technologies, such as artificial intelligence (AI) and blockchain, to improve their CDD processes.
AI is important such that it can help automate customer due diligence and related tasks, such as identity verification and risk assessment. Similarly, blockchain can track customer transactions and identify suspicious activity.
These new technologies are helping banks to meet the challenges of customer due diligence requirements in the digital age. However, it is important to note that due diligence in banking is an ongoing process and banks need to constantly mold their practices to the changing landscape of financial crime.
Customer Due Diligence for Banks in the United States
In the United States, there are several laws that regulate customer due diligence. These include the Bank Secrecy Act (BSA) and the USA PATRIOT Act. The BSA requires banks to identify and verify the identity of their customers, and to maintain records of their transactions. The USA PATRIOT Act [] requires banks to take additional steps to identify and report suspicious activity.
Banks that fail to comply with customer due diligence requirements can be subject to civil and criminal penalties. For example, in 2015, HSBC Bank USA was fined $1.9 billion for violating CDD requirements. []
Customer due diligence in Banking – How Modern Technologies Are changing the world
Modern tech has impacted every single sphere of life as we know it. From interpersonal relationships and grocery shopping to travel, every industry has been impacted greatly by technological advancements. Customer due diligence and institutions for whom it is a requirement are also one of such industries.
Artificial Intelligence (AI)
AI today is being used to automate customer due diligence tasks, such as identity verification and risk assessment. AI-powered solutions can analyze large amounts of data to identify potential risks and flag suspicious activity.
For example, AI can compare a customer’s photo ID to their online profile for online KYC. Similarly, AI can also track customer transactions and identify patterns that suggest suspicious activity.
Blockchain
Blockchain is a distributed ledger technology that helps track customer transactions and identify suspicious activity. The blockchain is a tamper-proof record of transactions. This means that it can aid in verifying the authenticity of transactions and to track the flow of money.
For example, blockchain can track cryptocurrency transactions to identify potential cases of money laundering. Similarly, blockchain can also help track the movement of goods and services to identify potential cases of fraud.
Some Other Technologies…
In addition to AI and blockchain, other technologies are also being used to improve customer due diligence. These technologies include:
Biometrics
Biometrics, such as fingerprints and facial recognition, are important for verifying the identity of customers for KYC.
Data analytics
Data analytics allow us to analyze large amounts of data to identify potential risks and flag suspicious activity to keep efficient customer due diligence ongoing.
Risk scoring
Risk scoring for customer due diligence helps assess the risk of a customer engaging in financial crime. This is particularly useful for AML customer due diligence, and abiding by laws related to it.
The Future of CDD
The future of customer due diligence is likely to be shaped by the evolution of technology, the changing regulatory landscape, and the rise of new forms of financial crime.
As technology continues to evolve, banks will need to use new technologies to improve their CDD processes. The regulatory landscape is also likely to change, as governments introduce new regulations to combat financial crime.
The rise of new forms of financial crime, such as cybercrime, will also pose challenges for customer due diligence. Banks will need to adapt their CDD practices to address these new threats.
Conclusion
Customer due diligence is an essential part of cyber and financial crime prevention. In the digital age, CDD has become more challenging due to the rise of online fraud and the increased use of virtual currencies.
The evolution of technology, changing regulatory landscape, and the rise of new forms of financial crime are shaping the future of CDD. Banks need to stay ahead of the curve by adapting their CDD practices to these changes.