What is a risk-based approach to Customer Due Diligence (CDD)?

A risk-based approach means that financial institutions prioritize their due diligence efforts based on the level of risk posed by each customer. Higher-risk customers, such as those involved in complex transactions or from jurisdictions known for financial crime, undergo enhanced due diligence (EDD). This involves more thorough scrutiny and monitoring to ensure compliance with regulatory standards and mitigate potential risks.

Why is it important?

Implementing a risk-based approach allows institutions to allocate resources efficiently. By focusing more intensive scrutiny on higher-risk customers, they can better identify and address issues such as money laundering, terrorist financing, fraud, and sanctions violations. This targeted approach not only enhances compliance with international KYC (Know Your Customer) standards but also strengthens the institution’s overall risk management framework.

Main Risks Addressed by CDD:

1. Money Laundering: Preventing criminals from disguising illegally obtained funds as legitimate income through financial institutions.
2. Terrorist Financing: Detecting and disrupting financial flows that support terrorist activities and organizations.
3. Fraud: Protecting against various forms of financial fraud, including identity theft, payment fraud, and insider fraud.
4. Sanctions Busting: Ensuring compliance with international sanctions regimes by identifying and preventing transactions that violate sanctions imposed by governments or regulatory bodies.

Read more: What is Customer Due Diligence in Banking and Financial Services?

Adopting a risk-based approach to CDD enables financial institutions to tailor their due diligence efforts according to the specific risks posed by each customer. This proactive strategy not only strengthens regulatory compliance but also enhances the institution’s ability to safeguard against financial crime and maintain the integrity of the global financial system.

About Neotas Customer Due Diligence

Customer Due Diligence Solutions:

• Enhanced Due Diligence
• Management Due Diligence
• Customer Due Diligence
• Simplified Due Diligence
• Third Party Risk Management
• Open Source Intelligence (OSINT)
• Customer Due Diligence Requirements
• Risk-Based Approach (RBA) to AML & KYC risk management
• Anti-Money Laundering (AML) Compliance and Checks
• Introducing the Neotas Enhanced Due Diligence Platform

Risk-Based Approach and AML Case Studies:

• Case Study: OSINT for EDD & AML Compliance
• Overcoming EDD Challenges on High Risk Customers
• Neotas Open Source Intelligence (OSINT) based AML Solution sees beneath the surface
• ESG Risks Uncovered In Investigation For Global Private Equity Firm
• Management Due Diligence Reveals Abusive CEO
• Ongoing Monitoring Protects Credit Against Subsidiary Threat
• AML Compliance and Fraud Detection – How to Spot a Money Launderer and Prevent It