Robust Cdd Acts As A Fraud Prevention Mechanism
Fraud is a big problem around the world, especially since the digital age has made it easier to hack and crack identity systems.
Social engineering schemes and data beaches that involve the theft of personal data are the largest contributors to fraud. With nearly 450,000 cases of ID fraud and 160,000 cases of credit card fraud in the USA each year, reports show that fraud almost tripled between 2014 and 2018.
In fact, synthetic ID fraud , is the fastest growing type of fraud. It is also the type of fraud that hits financial institutions the hardest.
Studies show that 85-95% of synthetic ID fraud cannot be identified by traditional fraud detection mechanisms.
Take the example of , UKs most notorious female fraudster. Michaela conned banks out of nearly $17 million using fake IDs to submit house offers and default on mortgages.
Alternatively, consider the case of Kelvin Lyles, who used synthetic identities to establish credit histories to scam credit card companies out of $350,000.
Perhaps even worse is the 2019 indictment of five men who collaborated to steal PII from thousands of military members. The fraudsters hacked the Defense and Veterans Affairs benefits websites to steal millions of dollars.
What these examples show is that a great deal of money can be fraudulently acquired using schemes that last a few weeks, months, or years.
Complementary Best Cdd Practices Review
If you have any questions about banking customer due diligence procedures, or wish to have an expert review your procedures, we are pleased to offer a complementary overview and discussion.
Please contact us here or call Charlie Schutt, Senior Consultant, Risk and Technology Consulting Services at 716.847.2651.
What Is Ongoing Customer Due Diligence
Ongoing customer due diligence is the process of revisiting and reverifying the information gathered during CDD, then asking for explanations of red flags that appear through activity monitoring, as well as periodically requesting updates to previously provided documents or information. A customer can be verified with standard CDD when opening the account, but the bank or financial institution may still have to perform ECDD on that customer for activities that occur after initial contact.
This checklist contains common red flags that you should look for during OCDD. Should any surface, investigate them promptly.
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Why Is Customer Due Diligence Required
Companies required to comply with AML regulations are also usually necessary to perform CDD, verify the customer’s identity, and assess their risk profile.
Here are several circumstances during which financial institutions and other companies must perform CDD:
- New business relationshipbefore entering a business relationship, companies must run a CDD check to ensure that their customer is not using a fake identity and matches the desired risk profile.
- Occasional transactionsSome transactions warrant CDD measures. For example, transactions involving money that exceeds a predefined threshold or any transaction with an entity located in a high-risk foreign country.
- Money laundering suspicioncompanies must run CDD checks when suspecting a customer of financing terrorism or laundering money.
- Unreliable documentationwhen customers supply inadequate or unreliable documentation, companies must apply CDD measures.
Companies should base their KYC and CDD checks on risk factors. For example, assessing each client’s risk concerning anti-money laundering or combating terrorism financing. And their due diligence scrutiny should be adjusted accordingly.
Most clients are subject to standard CDD measures, requiring customer verification and identification. The business can apply a simple CDD process when the risk is low. Once the initial screening passes, there is an assessment of the business relationship, and the company can decide whether to proceed.
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Submitting A Suspicious Activity Report
Financial institutions must submit a SAR if they suspect something in a transaction is illegal. Law enforcement will make a decision after a SAR has been submitted and the firm must not reveal to the customer that a SAR has been submitted.
Once a SAR is submitted, in the UK, the NCA has 7 working days to respond to the SAR. If it responds, it will either give consent or require a further moratorium period of 31 calendar days to investigate the matter before giving or refusing consent. If the NCA does not respond within the 7 working day period , there is deemed consent and the relevant individuals/entities who made the SAR will have a defence if they proceed with the activities.
Kyc Pkyc And Customer Due Diligence
CDD is a key part of AML compliance, and KYC should be the first step in any strong risk-based approach. SmartSearch can perform KYC checks on both domestic and international clients our resources can confirm identities in over 200 countries using our electronic verification software. You can even access this service on the go with our app, SmartAML. Perpetual Know Your Customer is a more dynamic all-encompassing KYC solution and said to be the future of risk management strategies.
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Why Is Cdd So Important
Customer due diligence processes are the gatekeeper for preventing financial crime. Offering a safeguard against money laundering, tax evasion, fraud, terrorist funding, and more, CDD is a mandatory process which can result in significant fines for non-compliance.
Here are the top reasons CDD is so important for your business.
Singapores Financial Market And Digital Payment Tokens
While there are heaps of digital tokens available in the financial market, from a Singapore legal perspective, it is crucial to look out of the box, considering the structure and characteristics of virtual tokens, as regulatory requirements vary depending on the struct and characteristics that fall under the category of legal payment token. The Singaporean government has legalized four different types of digital tokens that are circulating in the countrys financial market, namely security, payment, asset-backed, and utility tokens. However, these terms are not specifically defined as legal, yet they are only used for ease of discussion.
The term payment tokens refer to digital tokens that constitute either Digital Payment Tokens or e-money under the Payment Services Act , which came into effect on 28 January 2020. The PSA aims to streamline the payment gateways and services under unified legislation by combining the Money-Changing and Remittance Businesses Act along with Payment Systems Act. In addition to this, it also enhances the scope of regulated activities to take into account developments in payment services.
Under the PSA, all the payment activities that are regulated are required to get a license including account issuance services, cross-border and domestic financial transfer services, DT services, e-money issuance, and acquisition services.
A digital payment token, defined under Section 2 of the PSA, is a digital representation of value that
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Be Aware Of Hidden Beneficial Owners
A customer who wishes to launder money may use one of a number of structures to obscure or disguise the beneficial ownership of assets. Here are some of the methods that could be used:
- Shell company a company without any activity or that has no significant assets or operations
- Front company using a legitimate business to hide criminal activity and create legitimate funds
- Double invoicing sending funds from an offshore company that is actually repatriating already smuggled cash
- Trusts assets are placed into a trust for a beneficiary which can be paid without requiring a justification for a source of wealth
- Bearer bonds, securities and cheques where ownership is by physical possession, and can be cashed at any time
- Charities and non-profits cash intensive organisations that can take deposits without arousing great suspicion under the guise of using funds for a legitimate purpose
Read more: Anti-money laundering how to spot suspicious transactions
Which Institutions Are Subject To Cdd Regulation
While AML policies and due diligence are often considered as banking regulations, these standards also apply to various non-bank institutions.
While regulation and legislation varies between geographical locations, most places are seeing rule-tightening over which businesses and organizations should have CDD processes in place.
The Banking Secrecy Act in the USA outlines the rules around AML procedures. Section 352 of the USA Patriot Act amended the Banking Secrecy Act to expand the organizations that need to implement due diligence procedures. Where previously only banks felt the full force of AML compliance, now non-bank financial institutions must also establish AML programs.
The UK also has stringent AML policies under the Money Laundering Regulations 2007. These regulations outline the types of businesses that must install due diligence processes.
These businesses include :
- Money service businesses
- Art market dealers
- Bill payment services
In 2018, the EU updated their AML regulations with the fifth European Anti-Money Laundering Directive . This directive expands these business types to include art traders, tax-related services, virtual currency exchanges, and virtual currency wallets. A the end of 2020, the Sixth Directive establishing corporate liability for money laundering came into force.
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Why It Is Important
The importance of regulating the transactions of these individuals is a result of state based security consideration. The Bank Secrecy Act has led to the inception of EDD as a compulsory procedure by the Patriot Act of 2001.
The Patriotâs act required that private banking institutions, offshore banks and correspondent accounts obey EDD laws and regulations.
These laws and regulations are considered to be robust since they require a significant amount of evidence and detailed information.
The entire EDD process must be well documented in detail, especially in the account opening and client risk assessment stages.
So regulators have access to the data that is handled by professional data analysts.
The documents gathered from this mined data is used for reporting suspicious activities, anti-money laundering policies and other irregular transactions. This is what financial institutions say about EDD.
What Is Customer Due Diligence
In the world of Financial Crime Compliance , customer due diligence is an important and complex field.
Customer due diligence is the processes used by financial institutions to collect and evaluate relevant information about a customer or potential customer.
It aims to uncover any potential risk to the financial institution of doing business with a specific organisation or individual by analysing information from a variety of sources. These include:
- The customer themselves, who needs to provide certain information in order to do business with the financial institution
- Sanctions lists published by governments or territories
- Public data sources, such as company listings
- Private data sources from third parties
Customer due diligence is a major part of meeting Know You Customer standards. These vary greatly from country to country, or market to market.
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In What Instances Does A Bank Identify The Customer
The service provider must, as a rule, identify the customer prior to the commencement of the customer relationship. A customer relationship refers to, for example:
- opening of an account
- entering into a credit agreement
- subscribing for fund units
- concluding a securities brokerage contract
- signing of an insurance policy or
- an equivalent permanent customer relationship.
Factors That Affect An Enhanced Due Diligence
EDD is an ongoing process that is affected by many outside factors including customer, geographical, and additional risk factors. Some of them are discussed below:
1. Customer Factors. The regulation of risk of any institution must be in compliance with the BSL AML laws. Risk factors can include situations where the bulk of customers are non-residents of the institutionâs country of operation. There are also the tendencies of a customer or their relative being a politically exposed person.
2. Geographical Factors. Geographical factors, especially diplomatic relations play an important role in EDD. People from politically sanctioned countries will likely be classified as high risk customers when they want to make transactions. Also, locations with designated terrorists organizations operating within its borders will have its citizens placed as high risk customers.
3. Other risk factors. In the private, corresponding banking sector, there is high level of confidentiality. The industry is driven by revenue. As a result of this, they are prone to money laundering and terrorist financing.
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The 2022 Guide To Customer Due Diligence
Regulatory authorities across the globe are flexing their muscles when it comes to preventing money laundering.
The digital era has ushered in a new wave of financial crime, and regulatory bodies are pushing back by tightening anti-money laundering regulations and customer due diligence responsibilities in an attempt to crack down on the epidemic.
While regulations do help to prevent financial crime from occurring within and across financial institutions, stricter standards also mean increased costs, friction, and compliance staffing.
And, while financial criminals evolve constantly, it appears that CDD practices are still stuck in the dark ages.
Clunky, manual customer due diligence processes mean that AML compliance is slow, expensive and complex. This leads to many financial institutions falling short with inadequate CDD programs.
However, with regulatory authorities hot on the tails of poor AML programs, financial institutions can no longer afford to ignore the need for comprehensive CDD processes. If AML procedures dont conform with regulations, financial institutions face jaw-dropping non-compliance fines.
Luckily, GetID has the answer. By automating customer identity verification and authentication and monitoring processes, our next-generation solution saves time, money, and manpower while guaranteeing AML compliance now and for the future.
Solid Cdd Procedures Function As An Anti
In 2018, suspicious activity reports sent to regulatory authorities prevented $2 billion worth of unauthorized transactions in the UK.
Despite this, between the period of April 2018 and March 2019, reported numbers of SARs relating to money laundering rose by 52% compared to the year before.
While AML regulations are attempting to stamp out international financial crime, studies are showing these types of crimes are increasing to a pandemic level.
It is estimated that the amount of money laundered globally is between $800 billion and $2 trillion annually.
This is why customer due diligence is so important.
Thanks to more stringent procedures, criminal characters are being caught red-handed and cross-border crime rings are being disbanded.
However, with studies showing that 18 of the 20 biggest European financial institutions have been fined for poor AML measures, its no surprise that money laundering is increasing dramatically.
For example, a 2019 HMRC investigation found that one gang selling illegal cigarettes had stolen $44 million in VAT and laundered over $112 million across 50 banks around the world, including Cyprus, Hong Kong, the UK, and Dubai. If these 50 banks had tighter CDD procedures, these criminals may have been caught earlier.
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Purpose And Nature Of The Business Relationship
A firm shall obtain information about the purpose and nature of the business relationship.The information shall form the basis of
- an assessment of the activities and transactions that can be expected of the customer in the context of the business relationship
- a risk classification of the customer
If factors emerge that indicate a high risk, the firm shall take enhanced customer due diligence measures.
Why Does The Bank Take A Copy Of My Proof Of Identity
Service providers must document the customer identification and due diligence information. The information may be documented by, for example, taking a copy of the verification document.
Under the relevant regulations, service providers are also required to keep records of the name, number or other identifying information of the document used in the verification of identity, and information on the authority that issued the document. The information must be retained for five years after the termination of a regular customer relationship.
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What Is Cdd Process
A financial intelligence gathering or collection procedure called a cash clearance process identifies a customers potential money laundering or terrorist financing concerns based on pertinent information he or she has stored. The risk-based approach allows a company to determine where resources can be targeted better based on need instead of simply allocating resources on a case-by-case basis.
Customer Due Diligence Best Practices
The CDD process should be risk-sensitive, so the financial institution should apply the appropriate treatment, checks, and controls as commensurate with the level of risk. The treatment, checks, and controls should also depend on the type of customer, business relationship, nature of activity, and nature of transactions. These steps allow you to prioritize resources in areas that require more attention based on risk sensitivity.
To make the CDD and ECDD processes stronger and more efficient, incorporate these other steps and ideas:
- For standard-risk customers, verify only the standard information provided.
- Only collect basic account information for a low-balance, low-turnover deposit account.
- Public companies and their wholly owned subsidiaries are considered lower-risk, while privately owned companies and other entities are generally assessed as higher risk.
- Apply CDD and ECDD to beneficial owners.
- Dont allow anonymous business relationships.
- Report any suspicious activity.
- Keep all historical records related to the CDD/ECDD process.
- When relying on third parties to perform verification, ensure they are reliable and independent sources.
- Continuously monitor media for negative mentions.
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