{"id":16863,"date":"2020-07-02T06:00:42","date_gmt":"2020-07-02T06:00:42","guid":{"rendered":"https:\/\/www.trulioo.com\/?p=2856"},"modified":"2023-08-01T16:30:26","modified_gmt":"2023-08-01T16:30:26","slug":"customer-due-diligence","status":"publish","type":"post","link":"https:\/\/www.trulioo.com\/blog\/compliance\/customer-due-diligence","title":{"rendered":"Customer Due Diligence: ensuring that you Know Your Customer"},"content":{"rendered":"\n
\"Customer<\/figure>\n\n\n\n

Do your due diligence. That’s a fundamental rule of business and basically comes down to knowing who you are dealing with. For any financial services<\/a> institution, one of the first assessments made is whether you can trust a potential client; Customer Due Diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against potential financial crimes and nefarious activities.<\/p>\n\n\n\n

Know Your Customer (KYC) is the process of a business verifying a client\u2019s identity, and, if you are a financial institution, it’s more than a good idea, it’s enshrined in legislation. For Anti-Money Laundering (AML) purposes, KYC rules curtail financial activities of criminals and terrorists, and ensure that politically exposed persons (PEPs) are not getting caught up in bribery or corruption.<\/p>\n\n\n\n

After all, where there\u2019s money, there are also criminals lurking to take advantage wherever they can. By limiting financial activities, AML laws hit them where it hurts. And there\u2019s a lot of money to go after; the United Nations Office on Drugs and Crime estimates that 2 to 5 percent of GDP, or $800 billion to $2 trillion, is laundered annually.<\/p>\n\n\n\n

Besides being the right thing to do morally, the Customer Due Diligence (CDD) process is a smart business strategy to avoid heavy losses due to fraud, hefty fines, and sanctions, as well as bad publicity. Not knowing your customer in today\u2019s financial world is a non-starter.<\/p>\n\n\n\n

Due diligence around the world<\/h2>\n\n\n\n

While caveat emptor (buyer beware) has been around since Roman days, the concept was first codified into law in the U.S. Security Act of 1933, where the phrase due diligence<\/em> came into being. Cut to 2001, and the U.S. Patriot Act, where the idea of due diligence was applied to knowing your customers. Since then, the U.S. has strengthened CDD requirements, and similar laws have been passed around the world.<\/p>\n\n\n\n

There are generally three steps in the KYC process<\/a>:<\/p>\n\n\n\n

    \n
  1. Identify your customer, through a proper Customer Identification Program<\/a> (CIP)<\/li>\n\n\n\n
  2. Understand the customer activities<\/li>\n\n\n\n
  3. Assess money laundering risk<\/li>\n<\/ol>\n\n\n\n

    Taken together, steps 2 and 3 are the basis of CDD.<\/p>\n\n\n\n

    As of 2016, according to PwC, at least 92 countries have AML legislation with some form of CDD requirements. Here is a sampling:<\/p>\n\n\n\n

    Due diligence in <\/strong>China<\/strong>
    Type I<\/em>
    This account type is the most basic of the three, with transaction limits for outgoing transfers set to just over a total of $150, which includes transfers to the user\u2019s own bank account. However, satisfying the KYC requirements for this account only requires an online identity check. Once exceeding the limit, the customer must undergo additional identity checks to continue using the account.<\/p>\n\n\n\n

    Type II<\/em>
    For a Type II account, the KYC requirements are more stringent. To open this type of account requires an in-person identity verification or three external identity database checks. With this higher level of security in place, there is also a higher limit for outgoing transactions, at just over $15,000 annually. Additionally, this limit does not apply to transfers to the user\u2019s own bank account. This allows eCommerce merchants to use this type of account to receive and withdraw funds with no restrictions.<\/p>\n\n\n\n

    Type III<\/em>
    With a limit set to just over $30,000 per year, the Type III account would be suitable for investments as well as for making purchases. Because of the higher limit, the KYC requirements are, by far, the strictest. To open a Type III account requires either an in-person identity check or five external identity database checks. Like Type II accounts, transfers to a user\u2019s own bank account do not apply to the annual transaction limit.<\/p>\n\n\n\n

    Due diligence in<\/strong> South Africa<\/a><\/strong><\/p>\n\n\n\n

    Like many other Financial Action Task Force (FATF) member countries, part of the standard KYC process requires Customer Due Diligence checking. Also, Enhanced Due Diligence (EDD) procedures are mandatory in South Africa for both foreign and domestic PEPs, which describes anyone entrusted with a prominent public function or anyone who is closely related to such an individual.<\/p>\n\n\n\n

    Due diligence in <\/strong>Mexico<\/strong><\/p>\n\n\n\n

    On April 16, 2019, Mexico updated its AML law, the Federal Law for the Prevention and Identification of Transactions with Funds from Illicit Sources.<\/p>\n\n\n\n

    Regulated parties, according to the FATF, \u201care generally prohibited from opening or maintaining anonymous accounts<\/a>.\u201d An exception is made to promote financial inclusion for deposits of pesos into individual accounts that don\u2019t exceed a threshold. For financial transfers above USD $1,0000, basic information is required, while amounts over $5,000 require more detailed customer information. Further regulations and AML provisions vary based on the industry and regulator.<\/p>\n\n\n\n

    Mexican identity verification has grown in the past few years. While there has not been a legal requirement for independent verification, copies of identification are generally provided upon account openings. Furthermore, verification of Mexican identities is important for many U.S. businesses.<\/p>\n\n\n\n

    Due diligence in <\/strong>Canada<\/strong><\/a><\/p>\n\n\n\n

    Canada has updated its Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA<\/a>), with most amendments coming into force as of June 1, 2020. The definition of acceptable documents to ascertain identification has been changed from \u201coriginal, valid and current\u201d to \u201cauthentic, valid and current,\u201d enabling the use of document verification<\/a> as a fully legal process to help establish identity.<\/p>\n\n\n\n

    Going forward, there are three acceptable methods for identity verification:<\/p>\n\n\n\n