Customer due diligence in AML compliance: What it means and best practices

Anti-money laundering is one of the biggest threats to the financial services and regulated sectors, with the National Crime Agency reporting a predicted £100bn+ being laundered through and within the UK and UK-registered corporations annually.  

The scale of this problem means regulators are continually tightening rules and guidelines, with one main point of focus being on better customer due diligence measures. But what does this actually mean? And how can firms go about implementing this into their processes? Let’s explore.   

What is customer due diligence? 

Customer due diligence (CDD), also known as client due diligence, is the process of screening and conducting background checks on both potential and existing customers to establish their legitimacy and verify their identity. With regards to money laundering, CDD measures are put in place to ensure a client isn’t engaging in any illegal activity and is therefore not a risk to your business or other clientele.  

Although different institutions will have different customer due diligence requirements, at a minimum, all client due diligence standards have four main requirements at their core: 

1. Thorough customer identification and verification: Conducting a standard AML check that establishes and verifies customer identity, and can be expanded to include international ID checks. 
2. Beneficial ownership identification and verification: Sourcing information about beneficial ownership structures.  
3. Detailing the purpose of the business-customer relationship: Knowing why a customer wants to partner with your business is crucial for assessing risk.  
4. Ongoing monitoring: Your CDD processes should encourage perpetual compliance.  

Plus, screening should be done to ensure they’re not on any restricted lists, such as those for information on PEPs and sanctions.  

Best practices for customer due diligence 

Just last year, the FCA imposed fines of over £53m to firms failing to comply with AML regulations and neglecting to conduct proper CDD checks. With both financial and reputational loss on the line, getting clued up on the best practices for CDD should be one of the top priorities for your firm.  

   1. Implement a risk-based approach 

When you’re implementing customer due diligence into your AML processes, it’s important to note that not every customer needs the same resources dedicated to them. Some will naturally pose less risk than others and will therefore need less due diligence measures imposed onto them, whereas higher risk customers will need to be handled more stringently and with enhanced due diligence (EDD).  

However, it’s worth noting that client risk is never linear—circumstances can change at any time, and therefore customer risk-level needs to be monitored on an ongoing basis. This allows for perpetual compliance, keeping your business and customers safe from the impacts of bad actors. Got a large customer base or get high numbers of potential clients reaching out? Consider looking for automated compliance tools that can batch screen your clients, for enhanced protection and a bonus time-saving benefit! 

     2. Invest in employee training  

For full strength, your customer due diligence processes need to be executed by each and every team member—compliance is the duty of everybody, not just leaders or compliance managers. So, investing in training on subjects like AML, CDD, and financial crime plays an important part in getting it right and protecting your business and customers.  

Have teams working across various regions? There are plenty of online AML training options available which enable you to unlock greater compliance, more conveniently and cost-effectively. At Veriphy, we also offer an Advanced KYC training course to deep-dive into the world of KYC and AML globally.  

   3. Keep detailed records 

Under AML legislation, firms are required to keep a clear, thorough record of any CDD checks they undertake. This not only gives you peace of mind over what checks have been done on what customer, but also serves as proof—should the regulator ask you for it—that you have conducted the right level of checks for certain customers. According to these regulations, due diligence check records must be kept for five years from the end of the business relationship with the customer. So, make sure these are stored somewhere safely for the full required duration.  

Failing to comply with these requirements can result in legal and financial penalties, which can be detrimental to your business’s reputation.   

   4. Automate your AML checks 

Running AML checks on your customers can be a lengthy and complicated process if you’re relying on doing it manually. Not only can this significantly slow onboarding down, potentially putting clients off from advancing with your services, but it also leaves room for human error.  

Many firms across the globe are now handling the risks associated with manual AML checks by automating their compliance processes. These solutions run rapid checks on customers across global databases and return results in seconds, enhancing the efficiency and accuracy of your checks and tightening your client due diligence measures.  

   5. Enable real-time monitoring  

Generally, those working in the financial services sector and other regulated fields are required to reverify KYC, KYB and sanctions screening on their existing customers on a periodic basis, depending on the customer’s determined risk level. This is an essential move businesses must make to ensure they’re meeting client due diligence standards, and building a watertight defence against money laundering and other types of financial crime.  

By implementing ongoing client due diligence measures, like real-time monitoring, you can move your company away from a periodic AML and KYC approach, and towards a culture of compliance where perpetual compliance is the goal instead.  

Customer due diligence is a non-negotiable, so investing in it is a smart thing to do. Not only can it help defend you and your customers against bad actors, but it can remove the risk of regulatory penalties and reputational damage. It’s a win-win! 

Need help levelling up your CDD processes? Get in touch with our friendly team to find out more about our automated compliance solutions or to receive a free demo.