What is Customer Due Diligence?
In South Africa, the term Customer Due Diligence (CCD) is often used interchangeably with Know Your Customer (KYC).
Globally, Customer Due Diligence (CCD) is typically used as a legal term that refers to the range of due diligence checks that a business, institution or organization may conduct on its customers to assess risk and ensure regulatory compliance.
The majority of CCD checks will consist of identity verification and data validation checks that are conducted right at the beginning of a relationship with a client during the onboarding process before business is conducted.
However, in some instances, CCD checks will continue to be conducted throughout a business’s relationship with a client. For instance, high-risk individuals such as Politically Exposed Persons (PEPs) may be subjected to Ongoing Monitoring – a process of checks that are designed to continuously ensure the legitimacy of the individual and their associated financial transactions.
On the other hand, Know Your Customer (KYC) is a more flexible term, the meaning of which can change from country to country depending on the specific jurisdiction and set of regulatory frameworks. In South Africa, KYC is the better-known term that is typically used as a preferred synonym for CCD.
How to Conduct Customer Due Diligence (CCD)?
The CCD process is typically conducted as a business is establishing a relationship with a client – a process known as “onboarding”.
When conducting CCD checks, a business will typically be verifying:
- That an individual exists
- Whether that individual is exactly who they claim to be
- Whether that individual is eligible to receive the product or service in question
- Whether that individual poses a threat of money laundering or other such crime
In order to effectively verify identities, validate information and assess risk, the CCD process collects a variety of information about a customer. Information collected during the CCD process may include:
- Full name
- Date of birth
- Physical addresses
- Employment and employment history
- Physical appearance (biometric information)
In many countries, CCD is a legal obligation established by Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) legislation. In South Africa, the primary legislation for this purpose is the Financial Intelligence Centre Amendment Act, otherwise known as FICA.
Online Customer Due Diligence Services
Today, CCD processes have been completely automated and digital technologies have transformed how businesses can verify identities and validate information.
The incredible impact of digital tools on Customer Due Diligence is clearly demonstrated by ThisIsMe’s revolutionization of the FICA compliance process in 2017. Initially, FICA compliance cost businesses time and money by forcing them to engage in inefficient and lengthy administration that consumed human resources. The labour-intensive process of ensuring compliance also contained many moving parts that rendered it vulnerable to non-compliance or fraud. For customers, FICA compliance entailed complex paperwork and time wasted standing in a bank queue.
In 2017, ThisIsMe transformed the South African RegTech industry by cutting FICA compliance down from two weeks down to three minutes – an achievement that got the company featured as one of the Emerging 50 Rising Stars on 2018’s FINTECH100 list.
The transformation of FICA compliance – enabled by new online identification verification technologies – allowed businesses to save time and money and ensure the highest levels of AML/CFT compliance, while consumers benefited from easier documentation provision and near-instantaneous personal information validation.
Furthermore, the digitisation of CCD checks has greatly improved their accuracy. In the past, CCD checks were completed manually by humans, which was a slow process that was immensely inefficient and consumed a vast amount of resources.
Today, CCD checks have been completely automated. The digitalisation and automation of CCD have transformed the CDD process, making it not only cheaper, faster and easier but also far more accurate: technologies such as machine learning and liveness detection allow for the cross-validation of documents across various databases, which has greatly improved the detection of forged documents.
Why is Customer Due Diligence Important?
First and foremost, the customer due diligence process is essential for ensuring regulatory compliance. Financial institutions and certain businesses and organizations across the world are legally obligated to conduct a variety of customer due diligence checks on their clients before doing business. Failure to adhere to these regulatory compliance obligations can lead to serious penalties being handed down to the offending business – serious fines, sanctions and even jail time may be applicable.
Secondly, comprehensive customer due diligence protocols help to protect a business against falling victim to a wide variety of financial crimes – identity theft, vendor fraud and customer fraud can all be devastating for a victim business, yet all are forms of crime against which dedicated resources for CCD have proven to be effective for mitigating risk.
Finally, the customer onboarding process – complete with identity verification and data validation checks – will oftentimes be the first hands-on experience that a customer has with the business. It is, therefore, important to ensure that it is a good one; first impressions last and a bad customer onboarding process that contains sluggish and tiresome KYC checks can ruin your business’s image and lose your client’s business before they have even been onboarded.
Customer Due Diligence for Risk Assessment and Risk Mitigation
CCD checks form an essential part of the risk assessment and risk mitigation process. Customer Due Diligence tools – examples include identity verification and AVS checks – are vital tools that are used by businesses to assess and mitigate risk.
South Africa operates a Risk-Based Approach (RBA) to Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) legislation. In essence, this means that it is the business’s responsibility to assess risk and then effectively mitigate it.
Within the framework of an RBA, Customer Due Diligence checks are essential tools that empower businesses to gather vital information that can be used to accurately and effectively assess the risk level of individual customers.
Such tools are essential for safe economic activity. Firstly, CCD checks help businesses ensure regulatory compliance with national AML/CFT laws. Secondly, CCD checks help to mitigate the risks faced by businesses around the world – identity theft, illicit credit applications and customer fraud are all examples of economic crimes that comprehensive CCD protocols can help to mitigate.
Customer Due Diligence vs Enhanced Due Diligence
Customer Due Diligence (CDD). Consequently, the term CDD may be used to refer to a variety of identity verification and data validation checks that are used in all risk levels and during all stages of the customer journey – examples include basic KYC checks during standard onboarding procedures, as well as slightly less standard checks conducted as part of an ongoing monitoring program, conducted a while into the customer journey.
On the other hand, Enhanced Due Diligence refers to the comprehensive risk assessment checks that are used in specific circumstances when the risk level is higher than normal. For instance, transactions related to Politically Exposed Persons (PEPs) and high-net-worth individuals will typically be subjected to enhanced due diligence checks in order to account for and mitigate the higher levels of risk.
Therefore, while enhanced due diligence checks might fall within the broad concept of customer due diligence, not all customer due diligence checks can be classified as enhanced due diligence.
CCD, KYC, Identity Verification and Data Validation Services for South Africa
As South Africa’s leading provider of identity verification, data validation, risk assessment and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience how our suite of world-class solutions can empower your business, contact our team here.