Published On: Wed, Nov 22nd, 2017

Realize the true risk: why enhanced due diligence is the most effective way to mitigate financial crime

For financial firms, customer due diligence (CDD) is the starting point of their entire anti-money laundering (AML) system. It’s a standard requirement for global regulatory compliance which applies to both new and existing customers. From initial onboarding on through the entire customer life cycle, the compliance responsibilities of financial services customers include info gathering, appropriately profiling, identifying the ultimate beneficial owners of an account, and updating risk scores for continuous due diligence.

photo/ Daniel Diaz

As mentioned above, CDD is the first step in the overall AML process, because it establishes the customer profile and thus the baseline for future expected transaction behavior, against which suspicious activity monitoring (SAM) compare and alert AML analysts. That normal baseline can (and does) change as the customer does, whether that’s an individual climbing the corporate ladder or a company enjoying rapid growth. This is why CDD is an ongoing effort, and not a one-time procedure.

As it exists now, however, the CDD processes (including determining beneficial ownership) are manual and inconsistent, and incompletely capture the risks the customer poses. Compounding these issues is the fact that the complex process of identifying beneficial ownership and keeping the customer’s risk scores up to date can itself result in elevated regulatory scrutiny, risk to the firm’s reputation, and financial penalties – yet also damage customer satisfaction.

The conflict between providing excellent customer experience and CDD requirements aren’t solely external: firms themselves must come to an internal understanding of how the due diligence regulations apply to their customers, products, services, and business model.

Meanwhile, money laundering is continuing to grow in scale

As increasing global trade serves as an incubator for the growing complexity of criminal networks conducting money laundering and fraud, more sophisticated tools to discover and untangle them are required. The deeper the networks, the deeper AML analysts have to look.

This means the threats to financial firms (steep regulatory fines, criminal charges, reputational damage) are increasingly beneath the surface. Standard CDD , however, won’t uncover them. It’s not enough to do a cursory background check on customers, suppliers or business partners. You must verify the source of their funds. While CDD can raise red flags, only enhanced due diligence (EDD) – more thorough corroboration of the customer-supplied information through deeper analysis of data sources like public records – can uncover the indirect links and affiliations that could make you an accessory to financial crime.

How EDD enables companies to both accelerate business and comply with regulations

EDD requires a more robust software solution than standard CDD, and that begins with automation. In addition to both initial and ongoing streamlined applicant due diligence, the whole customer onboarding experience will be quicker. An automated EDD solution also facilitates ongoing due diligence by constantly feeding the detection models of the SAM tool updated and integrated data. EDD takes automation to the next level by mitigating regulatory issues by proactive customer assessment.

Another pitfall of current CDD processes, inconsistency, is also avoided by an automated EDD solution, since a uniform compliance policy can be implemented and enforced across the whole firm. EDD also requires software platforms which enable fair, evidence-based account risk decision making, alerting, and reporting. This move away from the subjectivity of traditional CDD goes hand in hand with policy consistency and ensures that anomalous transaction patterns and other indicators of financial crime don’t slip through the cracks.

In order to peer deeper into increasingly complex criminal networks, effective EDD software tools need to support more thorough corroboration across the firm, more robust data analysis and visualization tools, and more seamless storage, capture and analysis of information relating to the ultimate beneficial owners, relationships between accounts, customers, and other entities.

Satisfying these four requirements can actually resolve the conflict between business goals and regulatory compliance. By shortening the client onboarding processes, new revenue can come in weeks early with an automated approach vs. a manual one. Here’s another benefit: since automated EDD solutions allow the whole team to operate more efficiently, they decrease the cost of compliance.

Financial crime, including money laundering, is increasingly complex and global. As CDD rules and regulations try to catch up, EDD is becoming the norm. Software tools which support and automate this increased AML scrutiny while not harming customer satisfaction at the same time will play an ever more central role in financial risk management and compliance.

Author: Debbie Fletcher

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