Why is KYC and CDD Important? The importance of Know Your Customer or KYC and Customer Due Diligence or CDD measures to be adopted by organizations, as part of the overall AML/CFT compliance requirements.
Why is KYC and CDD Important?
KYC/CDD is important because to avoid the risk of onboarding criminals, including money launderers the organizations have to perform the KYC/CDD measures before onboarding.
KYC and CDD including the customer screening helps the organization in determining the actual legal, and professional status of the customer, such as a Politically Exposed Person or PEP, or a possible money launderer or criminal. Regulatory authorities and international bodies, such as FATF, emphasize the implementation of appropriate screening measures, to ensure that the KYC process implemented by the organization is robust.
Customer screening is important, to check whether the customers are legitimate, and their intentions are not malicious. Customer screening requires organizations to use reliable industry and regulatory data for screening purposes, which reduces the risk of using obsolete data points or information. Thie screening process helps in the identification of the true beneficial owner and reduces the risk of non-identification of the real owner of the account.
False positives contribute to an excess of administrative work because they must be investigated. They require a significant amount of effort to sift through possible matches in search of contradictory evidence. The false positives cost the organization money. False negatives, however, may cost the reputation of the organization.
Effective KYC and CDD Measures
The effective KYC/CDD measures helps in maintaining the standardized data about the banned entities, and black-listed organizations. It removes the need for inexact matching of data fields that can be better matched on an exact basis. A most data point is dynamic. Effective customer screening allows for “preflight” data standardization which may be accomplished by the compliance team itself, rather than having to involve the IT staff or other outside parties, which may compromise the confidentiality of the prospective customers.
Effective KYC/CDD enables the organization to connect to multiple data sources, and automatically integrate different types of data from different systems, which reduces the risk of onboarding the negative or banned entities. The customer screening process allows for easy creation of multiple names data sets for the possible matches and requires ensuring that only genuine risk entities are identified, and avoided for business relationships.
Final Thoughts
KYC is a process that uses CDD to verify a customer’s identity, financial profile, and risk level. Customer Due Diligence is the process of gathering and analyzing information about new customers in order to assess their risk of engaging in illegal financial transactions. KYC and CDD are required for AML to function. They are completely reliant on one another. Every day, the financial system processes millions of transactions, so knowing your customer is critical for your company. KYC, or Customer Due Diligence, gathers information about your customers in order to assess the level of risk they pose to the company.
