The world’s financial system is vulnerable to malicious activity from fraudsters, identity thieves, terrorists, money launderers, and other criminals. This vulnerability is why regulators have such strict requirements for banks, investment funds, investment managers, fund administrators and other financial entities to validate the identities and intentions of their customers and prospective customers. These customer checks are also known as customer due diligence (CDD).
Aside from regulatory obligations, a robust CDD process protects financial institutions against risks like financial losses, reputational damage and legal sanctions. Most fund and investment manager jurisdictions follow the FATF (financial action task force) recommendations to meet anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements. These requirements include:
Identifying the customer and verifying the customer’s identity.
Identifying the beneficial owner of an account or product and verifying the beneficial owner.
Understanding the purpose and intended nature of the business relationship.
Conducting ongoing due diligence on the business relationship.
While the requirements apply to new customers, financial institutions should also conduct periodic due diligence checks on existing customers, and CDD checks on customers that undertake large or unusual transactions.
However, the process of identifying and verifying a customer’s identity and the ownership, purpose and source of funds creates a significant operational challenge. Outsourcing can be an effective way to access technology, expand resources, drive operational efficiencies and reduce costs. While it is possible to outsource operational aspects of CDD, the initial financial institution maintains compliance responsibility. To make sure you stay compliant, perform a CDD check on your service provider.