What is customer due diligence?

One in four Australians have been a victim of identity crime at some stage in their lives, and the Australian Institute of Criminology (AIC) estimates the annual economic impact of identity crime is over A$2 billion. To mitigate these losses as well as the reputational damage of identity crime, it is critical for businesses to know who their customers really are.

Customer due diligence — particularly customer due diligence for banks — is the best means of evaluating whether the person on the other end of the transaction is who they say they are.

Know your customer (KYC) procedures are a necessary part of anti-money laundering (AML) and counter-terrrorism financing (CTF) compliance. With the right customer identity identification and customer due diligence (CDD) processes in place, businesses can identify unusual transactions and behaviour, which allows for the detection and reporting of high-risk customers.

What does customer due diligence (CDD) involve?

According to Austrac, “To identify, mitigate and manage money laundering and terrorism financing (ML/TF) risk, you need ongoing customer due diligence processes. This includes developing and documenting an enhanced customer due diligence program and a transaction monitoring program.”

So what does this mean? CDD generally involves businesses — particularly banks and financial institutions — collecting identifying information from customers to confirm who they are. This could include verifying a customer’s name and address against a bank statement, or checking someone’s personal contact details and birthdate against their Medicare card information. By doing this due diligence, businesses are mitigating the risk of unknowingly working with financial fraudsters, money launderers, or other financial criminals. This is sometimes also referred to as Know Your Customer Customer Due Diligence (KYC CDD).

CDD also covers business-to-business transactions and relationships. For example, if the ownership, directorship, address, or other important identifying details of a business have changed over time, it is critical for the relevant financial institutions to have the most updated details verified.

Knowing the nature and purpose of the business helps financial institutions identify suspicious behaviour and reduces the risk of money launderers or terrorism financers fraudulently interacting with that business.

AUSTRAC states that applicable customer identification procedures (ACIP) must consider, among other things:

• the nature, size and complexity of your business
• the purpose of your business relationship with your customers
• the type of ML/TF risk you might reasonably face
• customer types (including beneficial owners and politically exposed persons)
• customers’ sources of funds and wealth
• control structures of non-individual customers
• types of designated services provided
• how you deliver these services
• the foreign jurisdictions you deal with

Going a step further with Enhanced Customer Due Diligence (ECDD)

ECDD involves conducting extra checks, verification, or collection of further information to confirm a customer’s identity. This may be necessary in the following cases:

• money laundering or terrorism financing risks are deemed high
• the customer is a foreign politically exposed person (PEP)
• the customer has acted suspiciously and led to the submission of a suspicious matter report (SMR)
• it involves a person or company located in a high-risk country, region or group

How money laundering, identity crime, and terrorism financing are evolving

Crime syndicates are using a range of human-based and bot-based strategies to take advantage of vulnerable businesses and consumers, particularly during times of uncertainty or change like the COVID-19 pandemic.

Money laundering is one of the three critical organised crime risks to the Australian community, according to AUSTRAC. In 2021, AU$12 billion was laundered in cryptocurrency alone, representing a 30 per cent increase from 2020.

The Australian Consumer and Competition Commission (ACCC) has also reported via Scamwatch that scammers cost Australians over A$34 million in January 2022. The most costly of these scams were investment scams.

Financial criminals have historically leveraged times of personal interest or vulnerability, such as the pandemic, Valentine’s Day, shopping sales seasons, and timely callouts for financial donations, such as during a natural disaster.

Consumers and businesses alike should stay particularly vigilant during these times and plan ahead where possible.

Our products can help you with KYC

Our identity solutions can help you meet your KYC obligations, verify your customers’ ages and check for Politically Exposed Persons (PEPs) and sanctions.