Financial establishments need to take extra precautions when it comes to keeping their information and assets safe from fraud. This is why banks practice KYC Due Diligence when they make transactions or work with new consumers.
What Is KYC?
Short for “Know Your Customer” Due Diligence, this method is just what you would expect — it is about knowing your customer. If your institution gets caught up in an incident of fraud or money laundering, it could face both financial and legal repercussions. For example, Deutsche Bank was fined a staggering $630 Million in 2017, for failing to prevent a money laundering scheme. Before you make a transaction with any group or individual, it is important to first make sure you understand them and their goals.
Let’s say you are planning to make a high-risk transaction with someone. Your first order of business is to identify your customer, so you know who you are dealing with. This may include collecting their personal information, their background, and learning more about their financial activities.
By having all this information, you can evaluate the risks of working with the person, and report them if you encounter any suspicious activity. Practicing KYC Due Diligence could save your institution precious time and money, while preventing complex legal issues.
Levels of KYC Due Diligence
When you are working with any additional party, you could be putting your business at risk — but some transactions carry higher stakes than others. For example, you would probably put less time and energy into investigating a low-volume account than you would put into a higher-value transaction. KYC Due Diligence requirements ensure that you take the appropriate precautions when dealing with a customer.
There are three general levels of KYC Due Diligence that a bank might use before making a transaction. These include:
- Simplified Due Diligence (SDD): SDD is the lowest level of Due Diligence, used only when the criminal risk is low. In this case, you can identify your customers and their basic information without having to check activities or do detailed risk assessments. You or other staff will still monitor the business/customer relationship on an ongoing basis, to make sure the customer doesn’t show any future signs of suspicious activity.
- Basic Customer Due Diligence (BCDD): As the second level of KYC Due Diligence, BCDD requires more information-digging than SDD. If you have any suspicions of your client, it is important to both identify the customer, and gather data that will help you verify that identity.
- Enhanced Due Diligence (EDD): EDD is a form of Due Diligence reserved for high-value consumers and at-risk transactions. This is a much more in-depth process that includes close monitoring and a careful search for detailed information. Experts will also be enlisted to analyze data on the customer, and will need to take all relevant information into account.
KYC Due Diligence Best Practice Checklist
Knowing your customer takes careful planning and research. If you want to build an effective system that helps you protect your financial establishment, there are a few best practices you need to keep in mind. Take a look at the practices below to see if you have a complete KYC Due Diligence checklist:
- Create a Customer Identification Program (CIP): U.S. laws indicate that all financial institutions need to establish a CIP to prevent risks related to money laundering and terrorism. A compliant CIP has four requirements that each customer needs to provide: name, birth date, address, and identification number. After you have collected this information, you will verify the customer’s identity, with either records and documents, or other reasonable methods of verification.
- Use the Customer Due Diligence Levels: Using CDD effectively includes conducting a risk assessment based on the information you gather about a customer. If you are concerned about someone’s identity and motives based on their occupation, transaction patterns or other factors, it is the right time to start a more thorough investigation of the person.
- Continue Monitoring Your Customers: Assessing risk is an ongoing process. Whether you found anything suspicious in your most recent investigation or not, it is important to continue watching for unusual activity and other potential risk factors. If you encounter any issues with an otherwise low-risk customer, you can then take the appropriate action before they have the chance to hurt your business.
Optimize Due Diligence With Hydrogen’s Molecule
Practicing KYC Due Diligence will help you better secure your bank and your customers. At Hydrogen, we can help you implement a more effective customer due diligence program with Hydrogen Molecule, a product that allows you to use the power of Blockchain with your applications. Molecule’s identity framework is the ideal solution for all your customer identification needs. Reach out to us today to learn more.