There’s more to CDD than meets the eye

It’s been made part of your AML legal obligations because it safeguards the UK’s financial system from being exploited and being used for money laundering (ML) terrorist financing (TF) and proliferation financing (PF).

Effective CDD processes equip you with an in-depth understanding of your clients. This means delving into details such as the source of their funds, ultimate beneficial ownership and identifying any associated risks, before starting a client relationship.

In this article I’ll look at the steps involved in your CDD, to give you a better understanding of what your processes should entail.

The client risk assessment

You need to complete a client risk assessment to get a preliminary understanding of the risks that client presents. This allows you to determine the client’s risk level, and then apply the right level of CDD to them.

This is part of the risk-based approach, which is advocated by the current AML guidance and legislation. Using it helps you to efficiently assign resources where they’re needed most.

Please note that if your CDD work reveals hidden risks connected with a client you previously deemed to be lower risk, you’ll need to revisit and update their risk assessment.

Understanding your client

To satisfactorily fulfil the CDD part of your AML regulatory requirements, you need a deep understanding of certain key aspects of your client and their business. This information needs to be reviewed and updated regularly and as the client's and your firm’s circumstances change.

1 Verification and validation of identity

Does your client’s identity exist and do they have a right to that identity? In other words, is your client who they claim to be. You can verify this by comparing their likeness to an original government-issued photo ID (a passport or driving licence, for example), and gathering proof of address (like utility bills). You can also run these checks online but that’s not necessary to be compliant. Be careful if using an online check that the process gives proof that an individual has the right to use the identity that they’re claiming.

If you haven’t met a client in person to certify their ID, also consider a biometric check to match a live image of an individual to the image on their government-issued documents.

2 Source of funds

Understanding the origin of the client's wealth is intrinsic to the CDD process. It involves probing deeper into where their funds originate from and the legitimacy of their wealth.
You need to consider their occupation, assets and country of residency as part of this. This is because you must ensure these funds aren’t coming from or through any high-risk jurisdictions with inadequate AML regulations. Any suspicion about funds being the proceeds of crime must trigger a suspicious activity report.

3 Ultimate beneficial owner

Criminals often use opaque company structures to hide illicit funds and sources of funds. Identifying the ultimate beneficial owner (UBO) is required to maintain transparency. This allows law enforcement to link any reported proceeds of crime with those responsible for generating them.

4 Understanding the client's business

A nuanced understanding of the kind of businesses your clients are involved in helps you to customise your AML policies, controls and procedures (PCPs). You need to keep in mind the specific risks each sector may pose. Knowing about a client’s business also enables you to spot any unusual activity in their transaction patterns.

5 PEP and sanctions screening

Screening clients against politically exposed persons (PEP) lists and sanction lists allows you to identify potential high-risk individuals, entities or vessels.

6 Adverse media screening

Screen clients using a Google search of publicly available information like news reports and lawsuits, and for connections to PEPs or high-risk jurisdictions. This provides insightful details about their past involvement in potentially criminal activities.

Keep records of your work

Audit-worthy records act as proof of compliance when you’re inspected by your supervisor or called on by law enforcement. It involves maintaining copies of identity verification documents, transaction details, source of funds and wealth information, and screening checks, among others.

These records not only serve as evidence of your business’ robust CDD measures but also ensures the accuracy of each client's risk profile. It also protects your reputation and helps avoid potential fines for non-compliance.

Embracing a risk-based CDD approach

AML regulations recommend taking a risk-based approach to your business’ AML. When it comes to CDD, this means tailoring your actions depending on each client's risk profile.
Lower-risk clients may be eligible for simplified due diligence (SDD). While higher-risk clients may demand enhanced due diligence (EDD), which warrants additional information and verification steps.

The importance of regular monitoring

CDD should never be just a one-off process. To comply with AML regulations and detect any suspicious activities that may indicate ML, TF, or PF, your CDD information needs to be up to date. Transaction reviews, changes in a client’s information and awareness of any a change in their business are all integral parts of your regular monitoring.

Again, you need to keep records of this monitoring. This way, if you’re asked for your client’s information you’ll be able to give a full and detailed picture of their whole relationship with you.

Richard Simms, MD of FASimms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at Accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.

For more information on how AMLCC could keep your business AML compliant, please visit https://www.amlcc.com/accountancy/