In today’s fast-paced digital landscape, the importance of efficient, accurate, and real-time customer onboarding cannot be overstated. One crucial aspect of this process is Know Your Customer (KYC), a standard due diligence procedure that regulated entities must use to verify the identity of their customers.

As the demand for seamless digital experiences grows, KYC automation is emerging as a pivotal solution to streamline customer onboarding processes.

A brief overview of KYC and customer onboarding

Know Your Customer (KYC) is a regulatory requirement that mandates businesses, especially those in financial services, to verify the identity of their clients at the point of account opening.

The process assists fraud prevention efforts, Anti-Money Laundering (AML), and prevention of financial crime by ensuring that businesses truly know who its customers are.

Customer onboarding, on the other hand, refers to the entire process of forming a relationship with new customers. This includes gathering the necessary information, verifying it, and setting up a customer’s account.

Traditionally, KYC and customer onboarding have been manual processes involving physical document verification, extensive paperwork, and a significant amount of human interaction.

Whilst a manual approach to verification works for a small minority of businesses, it is time-consuming when dealing with a significant number of customers, prone to errors, and more susceptible to a poor customer experience.

Challenges of manual KYC onboarding processes

Manual KYC onboarding presents several challenges that can hinder the efficiency and customer experience of the onboarding process:

1. Time-consuming: Manual verification of documents and data entry can take several days or even weeks, delaying the onboarding process and frustrating customers.
2. High costs: The need for dedicated staff to handle KYC checks and the associated admin works increases operational costs.
3. Human error: Manual data entry can be susceptible to mistakes, leading to potential compliance issues and inaccurate customer information.
4. Poor customer experience: Lengthy and cumbersome onboarding processes can frustrate customers, leading to dissatisfaction and potential loss of business.
5. Scalability issues: As a business grows, the volume of KYC checks increases, making it more challenging to scale operations and keep on top of compliance without automation.

What is automated KYC?

Automated KYC involves the use of technology and software to enhance the onboarding process. By leveraging these tools, businesses can automate various steps of KYC, from data collection to document verification and data extraction. Some of the main technologies used in automated KYC include:

KYC software

This typically involves an API integration at onboarding and matches the data inputted by the customer on the onboarding form to data sources such as Credit Reference Agencies, Electoral information, and telco.

Biometric verification

Biometric technology such as facial recognition and fingerprint scanning enhance security by ensuring that the person submitting the documents is the actual individual attempting to onboard.

Optimate Character Recognition (OCR)

OCR technology extracts information from scanned documents and images, converting it into machine readable text and verifying the document itself is legitimate.

Artificial Intelligence (AI) and Machine Learning (ML)

Emerging as a new method to perform automated KYC, AI and ML can be powerful as both can create algorithms to analyse and verify data, identifying patterns and anomalies that may indicate fraudulent activity.

How automated KYC works

The reason why automated KYC has emerged as a more popular choice of customer verification in the last decade is because it works the same as traditional manual verification, but more efficiently and in real-time. A typical onboarding process includes:

1. Data collection: Gathering customer information (including name, address, date of birth, and Government issued ID documents) through digital forms and document uploads.
2. Identity verification: Once the personally identifiable information is entered by the customer, an API integration will send the information to match against data sources and find a match.
3. Compliance checks: If a successful KYC is found, the customer can then move onto the account opening process. If a match is found against a PEP, sanctions, or adverse media list, or if a KYC match is not found, the compliance team can be notified to perform manual intervention and investigate further.
4. Approval and onboarding: If a match successful match for KYC is found in step 3, the customer can be automatically approved and onboarded. If the compliance team must perform a manual intervention, the customer will be notified that either their application has been approved or rejected dependent on the result of the investigation.

If a business is using manual KYC, all the onboarding steps will take longer and require more human input, whereas automated KYC ensures that legitimate customers can complete onboarding seamlessly and reduce the amount of time spent on each verification.

How KYC automation helps business

KYC automation address the challenges presented by manual verification in several ways:

Speed and efficiency

Automated processes significantly reduce the time required for KYC checks, enabling faster customer onboarding.

Cost reduction

Automation lowers operational costs by minimising the need for manual intervention and reducing errors that can lead to costly compliance issues including fines and suspensions.

Accuracy and compliance

Automated systems are less prone to human error as it reduces workload, ensuring more accurate data collection and better compliance with regulatory requirements.

Enhanced customer experience

A streamlined and real-time onboarding process improves customer satisfaction and reduces drop-off rates within the onboarding journey.

Scalability

For businesses looking to grow their customer base, automated KYC can easily scale to handle increasing volumes of KYC checks.

Are there any challenges with automated KYC?

Whilst KYC offers numerous benefits including improved efficiency, cost reduction, and scalability, businesses should be wary of several factors before deciding on changing their process.

Initial investment: Implementing automated KYC software can involve significant investment. It is critical that businesses find a supplier with a favourable pricing model without sacrificing quality.

Integration headaches: Some automated KYC solutions will require complex and time-consuming integrations or won’t be able to work with existing systems. Its vital that during the consideration of a new platform, businesses understand the integration process and how new systems can work seamlessly with other internal systems.

Data privacy: Outsourcing KYC to achieve automation likely means that businesses will be storing customer data in an external platform. Therefore, understand the security measures and data privacy of the external provider should be carefully considered to ensure compliance.

How to transition to automation KYC

Transitional to automated KYC requires careful planning and execution. FullCircl has created the ultimate Buyer’s Guide to IDV & KYC software to help businesses navigate the market. Here’s a step-by-step 4 stage framework to follow:

1. Review the current state of play: Are you using any KYC tools currently? Or are you using too many?
2. The research phase: Not all KYC platforms are built equally. There are many distinct types of vendors out there, each with different solutions, coverage, experience, and costs. It’s vital to do your research.
3. The approach: It’s time to put each vendor through their paces. Understand first-hand experience of the KYC capabilities, features, dashboard, and of course the verification process itself.
4. Decision time: You should now have all the information you need to make an informed choice and be confident you have selected the KYC partner or solutions best places to fulfil your current and future needs.

Want to learn more about the KYC buying process? Download our ultimate guide here.

How FullCircl can help

FullCircl’s automated identity verification platform includes automated KYC in 160+ countries, a full suite of AML checks including PEPs, sanctions, adverse media, and watchlists, fraud prevention tools, and more.

FullCircl is trusted by 500+ clients to support compliant growth, efficient customer onboarding, and innovative use of technology. Interested in learning more? Book a demo here.

Key takeaways from the FCA’s Consumer Duty: 1 Year on update

The Consumer Duty sets a higher standard of consumer protection in financial services.

On 31st July 2024, one year on from the date the Duty come into force, the Financial Conduct Authority (FCA) held an event to mark this milestone.  

Sheldon Mills, Executive Director, Consumers and Competition, at the FCA, was joined by his colleagues Graeme Reynolds, Director of Competition; Therese Chambers, Joint Executive Director or Enforcement and Market Oversight; and Dominic Cashman, Director of Authorisations. Along with Abby Thomas, Chief Executive and Chief Ombudsman at the Financial Ombudsman Service, they discussed:

• The impact the Duty has had in its first year
• Examples of good practice and areas of improvement
• Priorities for the year ahead

Let’s look at each in turn as we breakdown the key takeaways.

The impact the Duty has had in its first year

One year on and this outcomes-based approach has fundamentally transformed how businesses interact with their customers – driving cultural change and competition across the financial services market.  

The FCA point to some important results/successes:

• Sharing of best practice
• Reduced commissions in GAP products driving savings for customers
• New product lines introduced
• No more "double dipping"
• Implementation of customer experience driven KPIs
• Communications with customers are clearer and easier to understand

It does acknowledge however that the Duty has increased complexity, especially for smaller firms.  With challenges including the completion of fair value assessments, outcomes monitoring, and articulating fair outcomes. The FCA conceded that there does need to be a focus on simplifying the rules and reducing complexity.

Debate also continues about the challenges when it comes to balancing consumer protection and innovation.  Whilst the FCA maintains that the two go hand-in-hand, and it has taken proactive steps such as the launch of an AI Sandbox, the panel did recognise that concerns persist in terms of the risk of consumer harm from the innovation process, and that there needs to be a better balance and greater investment.

Examples of good practice and areas for improvement

The discussion then turned to best practice from across the financial services landscape.  Approaches the FCA suggests must be widely adopted moving forward.

Firms that are excelling according to the FCA do the following five things well:

1. Align culture with customer experience
2. Take a holistic approach considering the entire impact on the customer not just individual outcomes
3. Adopt a customer lens by gathering insights that help them really understand needs
4. Implement a data-driven approach both in terms of customer understanding and building credible evidence for the completion of fair value assessments
5. Maintain a culture of continuous improvement, learning, and outcomes-based monitoring

Priorities for the year ahead 

What comes next is a post implementation review to enable the FCA to see what has gone well and what hasn’t, including thematic work on specific sectors and product lines, gathering feedback on impact and complexity, and robustly checking that firms are delivering fair value.

What does success look like according to the panel?

• More innovation that delivers good outcomes
• A change in public dialog
• Firms saying yes to more applications
• Firms demonstrating that they are deeply looking at the requirements of the duty

There is no doubt that one year on the Consumer Duty regulations have been transformative for the financial services sector –increasing focus on protection and fostering a more customer-centric approach.  However, challenges persist, and they are placing a significant burden on firms.  

Strategic use of AI and data analytics is playing a key role in the delivery of Consumer Duty best practice - enhancing compliance efforts, driving revenue growth and improving customer experiences, whilst helping firms overcome the challenges, and deal with the compliance issues efficiently and effectively.  

Take a read of our new whitepaper ‘Regulatory Compliance & Consumer Duty: Strategies for Financial Firms’ to learn more about:

• The evolving landscape one year on
• The impact on firms
• Challenges and criticisms
• Future outlook
• Real-life examples of data-driven best practice

Download your free copy here

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The Financial Conduct Authority (FCA) has published its long-awaited review into the treatment of politically exposed persons (PEPs) - delayed as a result of the UK general election in June.

The key finding is that financial services firms need to take action to improve their treatment of domestic PEPs – including MPs, public servants, and their relatives/associates (RCAs).  

It has also launched a consultation into amendments to current PEP guidance to reflect that UK PEPs should be treated as lower risk, but warned firms to take action now to improve their processes, rather than waiting to act once it has been published in October 2024.

The FCA’s domestic PEP conclusions

The FCA found that some firms do not have:

• An effective procedure to conduct PEPs reviews (i.e. continuous PEP monitoring) to ensure that classification remains relevant and appropriate after an individual has left office.
• An appropriate risk assessment methodology taking into account all relevant risk factors and individual circumstances.
• Adequate process for data collection and therefore made disproportionate or excessive information requests.
• Enough clarity and detail in their communications with PEPs.
• The right training to ensure staff understand PEP procedures and achieve consistency in customer treatment.

Three key PEP actions financial services must take now

Firms must:

• Review and update the PEPs policies, procedures and controls in line with the updated guidance and deliver a risk-based and proportionate approach for the treatment of PEPs and RCAs.
• Communicate with PEPs and RCAs in a manner that is clear, effective and compliant with the Consumer Duty regulation.
• Make sure all staff are trained on the application of revised policies, procedures and controls.

A key point to note moving forward is that under the proposed new guidance that FCA will make amendments to ensure that the starting point for an any risk assessment of a domestic PEP is that they pose a lower risk than a foreign PEP.

Why a risk-based approach to the treatment of domestic PEPs is vital

Forming a risk-based approach to the identification, classification, and monitoring of PEPs can help financial services firms ensure that their treatment of domestic PEPs is not only fair and proportionate, but in line with their wider risk appetite and strategy, as well as Consumer Duty and AML compliance requirements.  

Enhanced Due Diligence (EDD) that draws upon a wealth of third-party data  (individual and RCA insights, KYC data, UBO and company structure information, industry and jurisdictional knowledge, financial checks, source of wealth, adverse media screening and relevant other indexes) is vital to the successful treatment of domestic PEPs – assisting in a number of ways including undertaking comprehensive risk assessments, delivering efficient onboarding experiences, and achieving continuous monitoring of individual PEPs.  

How can FullCircl help financial services firms get ahead of PEP regulation?

FullCircl's Anti-Money Laundering (AML) software can help financial services firms respond to the need to undertake different levels of risk assessment for domestic and foreign PEPs and sanctions – assisting with the delivery of robust yet proportionate action for each - via a single API integration.

Financial service firms can:

• Split out foreign and domestic PEPS, as well as regional, current and former PEPs and RCAs.
• Undertake automated assessments across a much broader spectrum of civil servants, political party officials, senior members of the police force, city mayors, national NGO officials, political pressure and labour group officials, without the need for excessive information requests.  
• Apply global law enforcement wanted lists, regulatory enforcement actions, global adverse media screening and global sanctions list.

As a result, firms can communicate and conduct business with PEPs and RCAs in a manner that is compliant with both AML and Consumer Duty regulation.

For more information on how to effectively conduct checks of domestic and foreign PEPs contact us to book a demo.

Know Your Customer (KYC) is part of Customer Due Diligence (CDD) used by regulated businesses to verify the identity of their customers and assess potential risks of money laundering, financial crime, and other illicit activities.

KYC is a fundamental aspect of Anti-Money Laundering (AML) measures, aimed at preventing financial crime such as fraud and identity theft. The importance of KYC lies in its ability to ensure that financial institutions, and other industries, are not used for criminal activities and to protect the integrity of financial systems.

Why different industries need KYC

Different industries require KYC to mitigate various risks associated with financial transactions and customer interactions. KYC processes help organisations comply with evolving regulatory requirements, prevent fraud, and enhance trust.

By effectively verifying the identity and risk profile of each customer, businesses can tailor their services and ongoing compliance efforts more effectively to ensure compliance with laws and regulations, which vary by industry.

Regulations and requirements for KYC

KYC regulations and requirements are enforced by government agencies and international regulatory bodies. These regulations stipulate the procedures businesses must follow to verify customer identities, monitor suspicious transactions, and report suspicious activities.

KYC compliance involve maintaining thorough records and audit trails to demonstrate adherence to these regulations. An example of KYC regulation is the 6th Anti-Money Laundering Directive which is enforced by the European Union. Regulated entities are required to comply with the 6AMLD to prevent fines, suspensions, and reputational damage.

KYC in banking

In the banking sector, KYC processes are crucial for preventing money laundering and terrorist financing. Banks must verify the identity of their customers at the point of account opening, making a concerted effort to understand the nature of their intentions, and assess the risk they pose.

This involves collecting detailed information during account opening including name, address, date of birth, and government issued identity documents to verify that the customer is who they claim to be.

Banks are also required to implement transaction monitoring systems to identify any high-risk transactions or movement of funds from current customers.

As more customers look to open accounts online, banks have progressed to using KYC software solutions to streamline digital verification in addition to traditional processes in brick-and-mortar locations.

KYC in FinTech

The FinTech industry has experienced hyper-growth over the last decade as more consumers turn to neo-banks and new age payments over traditional banking.

These companies must implement robust KYC procedures to mitigate risks associated with digital transactions and growing threats of fraud. KYC in financial services includes verifying identities using the same measures as banks, monitoring transactions, and using advanced technologies to detect suspicious transactions.

As the new and more sophisticated fraud threats emerge, FinTech companies are turning to AI and machine learning to mitigate more advanced fraud such as deepfakes.

KYC in Crypto

One of the higher risk industries requiring KYC is cryptocurrency. Cybercriminals have taken advantage of crypto to hide source of funds and perform money laundering on a significant scale.

Due to the fact cryptocurrency has not been regulated for KYC until recently, cybercriminals have ramped their efforts and targeted the less secure systems.

Cryptocurrency has remained largely unregulated, but with the UK Government demanding a regulatory focus for a safer industry, cryptocurrency providers are turning to KYC to prepare for looming global regulation and to keep fraudsters and cyber criminals from infiltrating their systems.

A typical KYC process for crypto is similar banking and FinTech by collecting personally identifiable information (including name, address, date of birth, and government ID documents) and verifying the information against trusted data sources. Although, as the industry is susceptible to being targeted, crypto providers may employ more advanced fraud prevention tools to further mitigate risks.

Gambling KYC

In the gambling and gaming industry, KYC is at the forefront of Anti-Money Laundering (AML) and identity verification efforts. KYC not only ensures that individuals are who they claim to be, it also ensures that customers attempting to onboard are of legal age to gamble.

Gambling is another industry that has suffered frequent attacks from fraudsters and money launderers and has historically been an industry that hasn’t adapted well to more secure requirements. One of the biggest recent fines for AML failings is Crown Resorts. On 11 July 2023, the Federal Court of Australia ordered the Australian gambling giant Crown Resorts to pay an AUD 450 million (USD 300 million) fine for repeatedly violating the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CFT Act”) between 2015–2022.

In addition to KYC, gambling operators are also now expected to prevent gambling related harm by understanding the risk of players developing a gambling addiction. The most recent regulation is an update to the 2005 gambling act which requires operators to screen customers for financial vulnerability indicators with affordability checks.

KYC in the insurance industry

KYC processes in the insurance sector help in preventing fraud and ensuring the legitimacy of policyholders. Insurance companies must verify the identity of their clients, assess the risk associated with insuring them, and comply with regulatory requirements including The Consumer Duty. This includes thorough documentation and ongoing monitoring to detect any fraudulent claims or suspicious activities.

How KYC software can help different industries

As digitisation and online account opening continues to become more popular, businesses in different industries are turning to KYC software to help onboard customers aligning to evolving KYC and AML regulations, whilst also offering customers a real-time journey.

KYC software consumed through an API integration at onboarding can be a powerful ally to regulated entities and compliance teams alike. Not only can KYC software ensure that KYC, AML, and anti-fraud can be completed in tandem, but it can also give businesses the opportunity to get to revenue faster by ensuring a seamless customer journey.

How FullCircl can help

FullCircl works with 700+ businesses in regulated industries seeking more efficient KYC and compliance processes. Our global KYC software is trusted to bring regulatory adherence whilst keeping revenue generation as a priority.

Interested in hearing more on how to produce an effective KYC checklist and compliance program? Click here to talk to the team.

As regulation and customer expectations grow, regulated entities face numerous challenges in maintaining compliance and security. One of the primary tools in preventing financial crime is the implementation of an effective Know Your Customer (KYC) checklist.

KYC and Anti-Money Laundering (AML) are essential in the prevention of financial crime, ensuring that financial institutions and other regulated industries can operate within regulatory guidance, keeping their customers and business operations secure.

According to the National Crime Agency, fraud accounts for over 40% of crimes in the UK, with an estimated 3.5million incidents of fraud experienced per year. Additionally, The United Nations Office on Drugs and Crime estimates that between 3 and 5% of global GDP is laundered each year.

These statistics prove that financial crime continues to plague businesses and markets globally, so implementing an effective KYC and AML framework to identify money laundering and fraud is critical.

What is KYC and financial crime?

KYC, or Know Your Customer, is a fundamental process for regulated industries aimed at verifying the identity of customers and assessing the potential risks of money laundering, fraud, or financial crime.

By implementing AML software and KYC checks at the point of account opening, businesses that are required to actively prevent financial crime can help mitigate these risks and protect their business from illicit activities.

KYC plays an integral role in the prevention of financial crime by confirming the identity of the customer is correct. This is achieved by matching personally identifiable information such as name, address, and date of birth against trusted data sources such as Credit Reference Agencies, or by using services such as document verification.

Whilst the KYC process itself is a key driver in preventing financial crime by confirming that the person attempting to open an account is who they claim to be, it is also a deterrent for fraud; potential fraudsters are much less likely to attempt to infiltrate businesses using effective KYC procedures and will instead seek businesses with less secure controls.

Financial Crime Regulatory Requirements

Regulatory bodies globally have established stringent financial crime and KYC requirements to ensure that businesses have clear guidelines on the prevention of financial crime and due diligence.

In the UK, the Financial Conduct Authority (FCA) plays a critical role in reducing and preventing financial crime through robust regulatory frameworks. Compliance with KYC regulations in the UK involves implementing comprehensive customer identity verification processes, transaction monitoring, and detailed Customer Due Diligence (CDD) requirements.

Other regulatory bodies involved in KYC and prevention crime include the Financial Action Task Force (FATF), the European Union who enforce Anti-Money Laundering Directives (with the latest being 6AMLD), The Bank Secrecy Act (BSA) in the United States, the Australian Transaction Report and Analysis Center (AUSTRAC), and more.

For global businesses, not only are they posed numerous challenges to prevent financial crime due to increasingly sophisticated techniques and more attacks than ever, but they also need to navigate the complexity of regulation and nuances between global regulators.

KYC processes and how they work with financial crime prevention

The KYC process typically involves three key steps:

Customer Identification Program (CIP)‍

The first step to KYC and financial crime prevention involves financial institutions having processes in place to collect and verify the personal information of their clients. The data collected during this phase includes name, address, date of birth, identification documents, and any other relevant information.

At account opening, most regulated businesses will require this information before the account can be opened. This can be done in several ways including integrating to automated solutions, building an in-house solution, or manually collecting information from customers. As digitisation increases, more businesses are turning to automation to ensure that the information can be collected in real-time.

Customer Due Diligence (CDD)

Once the information has been collected, businesses must assess the risk profile of each customer. This includes understanding any discrepancies in information provided against data sources, assessing if the customer is sanctioned or politically exposed, and identifying any potential indicators of fraud.

The benefit of automated solutions is that CIP and CDD can both be completed automatically and in real-time, only alerting the compliance team of any potential errors or risk flags and therefore, saving time and improving the efficiency of onboarding for any customers who don't pose a risk.

Ongoing monitoring

The KYC process doesn’t end with initial identity verification. Regulated entities are required to continuously monitor their customer base to be alerted to any changes that might impact financial crime infiltration. This includes re-screening customers against PEP & sanction lists, transaction monitoring to identify any indicators of fraud, and keeping all customer data secure for auditing purposes.

Best practices for effective KYC for crime prevention

To maximise the effectiveness of KYC in preventing financial crime, institutions should adhere to best practices including:

Regular training

Ensuring that MLRO’s and compliance teams are regularly trained of the latest KYC and AML regulations is crucial. This helps maintain a high level of awareness and competence in identifying emerging threats and leads to increased effectiveness of mitigating risks.

Use of advanced KYC solutions

Leveraging sophisticated Know Your Customer (KYC) software can streamline processes, making it more efficient and effective. With increased digitisation, manual verification is no longer fit for purpose in many cases. This means that businesses are under more pressure than ever to identify financial crime whilst offering customers with an efficient account opening experience.

Enhanced Due Diligence (EDD)

For high-risk customers, more rigorous scrutiny is required. Enhanced Due Diligence (EDD) involves a deeper, and in many cases more manual investigation into the customer’s background information and the source of their funds. For those customers marked as high-risk, businesses may decide to also increase the frequency of ongoing monitoring protocols.

How to maximise KYC processes with automation and technology

The increased use of technology to achieve growth has revolutionized the way financial institutions manage their KYC processes. Automation and emerging technologies such as AI and machine learning can significantly enhance the efficiency and accuracy of KYC operations.

KYC-as-a-service

Outsourcing KYC to specialist service providers can be an option to reduce the burden of managing and maintaining a KYC framework, allowing businesses to focus on their core business activities while ensuring compliance. However, pure outsourcing can lead to a lack of control so businesses should be wary of how much KYC control they relinquish if choosing this method.

KYC software

One of the more popular choices in the last decade is the implementation of KYC software. The global KYC software market is expected to grow at a compound annual growth rate of 20.8% from 2022 to 2023 to reach $15.81 billion by 2030. There’s a reason this is a popular choice as it offers both more control over KYC onboarding processes by providing customers with a real-time experience, but it also takes full onus away from businesses developing and maintaining their own systems.

Blockchain and AI

An emerging method of providing a secure and transparent way to manage KYC data is blockchain technology and artificial intelligence. Although this method is still untested at large scale, new businesses are emerging to try and use the very technology posing more threats through fraud advancements such as deepfakes, to prevent fraud and money laundering.

Future of KYC and financial crime trends

As financial crime continues to become more sophisticated, the future of KYC and AML practices is beginning to take shape.

Additionally, AI and machine learning will continue to evolve, providing not only further threats to businesses but also they may lead to potentially improving detection and identification.

There is also a growing appetite for global standardisation of KYC regulations. This would facilitate better cooperation and information sharing between jurisdictions. Not only would standardisation potentially lead to more effective regulatory guidance but would also make it easier for global corporations to navigate cross-border operations.

The final key trend to look out for is increased focus on privacy. Since the introduction of GDPR (General Data Protection Regulation) in 2018, more focus has been placed on keeping customer data secure to prevent threats online. Businesses will further have to ensure all data is secure to not only remain compliant but to keep their customers safe from new threats.

How FullCircl can help

FullCircl exists to remove the regulatory and verification roadblocks to drive revenue growth. Our suite of KYC, financial crime prevention, AML, and document verification software is trusted by 700+ clients to remain compliant and offer customers a seamless onboarding experience.

Want to learn more about how FullCircl can transform your approach to compliance? Book a demo here.

Customer Due Diligence (CDD) is a critical component of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF). The process involves regulated entities gathering and verifying personal information (including name, address, date of birth, and Government issued ID documents), to ensure customers are who they say they are and identity financial crime risks.

CDD regulations are designed to ensure that businesses have the knowledge and guidance required to implement effective CDD processes and prevent the risk of money laundering and other illicit activities.

Overview of CDD regulations

Various regulatory bodies are established globally to govern CDD regulations, each aiming to enhance the transparency and integrity of businesses and their relationship with customers. The main regulatory bodies & regulation includes:

Financial Action Task Force (FATF)

This is a global regulatory body that sets standards and promotes effective implementation of AML and CTF measures. FATF recommendations form the basis for many national and localised CDD regulation.

European Union (EU) due diligence regulation

The EU has established several directives aimed at CDD at AML, including the 5th and 6th Anti-Money Laundering Directives (5AMLD and 6AMLD), which mandate comprehensive CDD measures for financial institutions within its member states.

The USA Patriot Act

This legislation includes various provisions for AML, including stringent CDD requirements for regulated entities operating in the United States. The Patriot Act specifically requires institutions to establish a robust due diligence program, ensuring that all customers have their identity verified at the point of account opening.

The UK Money Laundering act

Governed by the UK’s Financial Conduct Authority (FCA), these regulations require businesses to implement robust CDD measures to prevent money laundering, terrorist financing, and other illicit activities.

Latest CDD regulation

Regulatory bodies are continually updating CDD regulations to enhance the growing risk of money laundering and fraud. The most recent updates add more pressure for regulated entities to utilise advanced CDD compliance processes to stay ahead of the fight against financial crime. Some of the recent updates include:

The 6th Anti-Money Laundering Directive introduced stricter penalties for non-compliance and extended the scope of predicate offenses for money laundering. The directive also introduced a closer focus on verifying Ultimate Beneficial Owners (UBOs) which has put more focus on businesses implementing Know Your Business (KYB) procedures.

In the USA, FinCen’s new CDD rule also requires financial institutions to identify and verify the identities of beneficial owners of legal entity customers. The introduction of beneficial ownership verification has followed in multiple jurisdictions due to the rising risk of fraud and money laundering in B2B relationships.

The UK’s Economic Crime Levy aims to raise funds to tackle economic crime, impacting firms regulated under money laundering regulation. Any entity whose UK revenue exceeds £10.2 million per year is required to pay the levy and it is collected by the Financial Conduct Authority (FCA), the Gambling Commission (GC), and HMRC.

Challenges of CDD regulation

Whilst the majority of customer due diligence regulation aims to achieve the same result of keeping businesses and customers safe from money laundering and financial crimes, there are naturally nuances between the regulation which makes cross-jurisdiction compliance even more challenging for regulated entities.

Complexity of regulations is one of the biggest challenges facing businesses needing to implement CDD processes. Different jurisdictions have varying CDD regulations, making it difficult for global entities to develop a uniform compliance strategy.

Not only are regulations complex, but they are also ever evolving. Regulatory bodies frequently update CDD requirements to address emerging risks, changing customer behaviour, and external factors. Regulated entities need to stay agile to continuously adapt their CDD policies, KYC and AML processes, and fraud prevention measures.

Adapting to changing regulation can also be resource intensive. Implementing effective customer due diligence measures is costly from a technical and workforce perspective, meaning that reliance on legacy systems can lead to security risks if the business isn’t willing to adapt to new requirements.

Finally, the CDD process involves a significant amount of data from customer screening. To remain audit-proof, entities are required to securely store all verification data across platforms and jurisdictions. Dependent on what systems are used, this can become complex and hard to manage.

CDD best practices

To effectively comply with CDD regulations, it’s important that regulated entities adopt best practices and have a clear understanding of what measures will deliver the required results.

CDD Policy and procedures

The first step to creating an effective CDD framework is to develop an internal customer due diligence policy. This document(s) should outline the steps required for identification, verification, and ongoing monitoring. By developing this, all teams within the organisation will understand what’s required during the CDD process, how to use the tools available to them to achieve results and keep updated on the latest regulation and what risks to look out for.

Risk-based approach

Regulated entities are advised to take a risk-based approach to compliance and CDD. This means that verification and investigation measures should be tailored to the specific risks posed by different customers and transactions.

For example, if a customer attempting to onboard is identified as an ‘Ex-PEP’ (previously politically exposed persons), the business should take more caution with this customer and assign a higher risk group or more verification methods for them. This will ensure that higher risk customers are flagged for Enhanced Due Diligence (EDD) checks whilst keeping lower risk customers free of unnecessary checks.

Training and awareness

One of the most critical elements to CDD is training and awareness internally. Many global corporations are operating with thousands of compliance employees who need to be educated on the latest regulations, fraud tactics, and how to ensure business security by using the latest guidance from regulatory bodies.

Technology and automation

With increased risk and developing fraud and money laundering tactics, CDD technology and automation has emerged as an effective best practice to stay on top of requirements. These systems will often aggregate multiple sources of data and compliance checks into a centralised system & will come equipped with audit-proof storage of data and reporting tools.

How automation can help with CDD regulation

As CDD regulation continues to become more complex alongside fraud and money laundering being more difficult to detect manually, automation (otherwise known as RegTech) has emerged as a key method to assist in the due diligence process.

By implementing an automated CDD platform, regulated entities can benefit from multiple efficiency improvements and begin to use account opening as a driver of growth and not a blocker to new customers.

Automation can significantly enhanced CDD processes by:

1. Streamlining data collection: Automated systems can efficiently gather and process large volumes of KYC, AML, and anti-fraud data from several data sources.

2. Reducing errors: Automation minimises the risk of human error in data entry and verification processes, ensuring that CRMs are enriched with correct and in-depth customer data.

3. Enhancing efficiency: Automated CDD systems can analyse customer information in real time, identifying potential risks and allowing for faster decision-making.

4. Ensuring compliance: Automated CDD can be regularly updated to align with the latest regulatory guidance, ensuring continuous compliance and keeping ahead of emerging risks.

How FullCircl can help

FullCircl works with 700+ regulated entities including 7 out of the top 10 UK banks to support CDD regulatory adherence and craft great customer onboarding experiences.

Our IDV platform includes access to global KYC, AML, KYC, document verification, and anti-fraud solutions, using data from 20+ global data sources. FullCircl is data agnostic so customers can choose the data sources that fit their specific use case.

Ready to learn more about how we can help with simplified, standard, and enhanced due diligence money laundering regulations? Contact us here for a free demonstration.