In the labyrinth of modern commerce, where transactions and interactions are increasingly digital, the due diligence process emerges as a guiding light. It’s the Know Your Customer (KYC) program’s faithful companion, ensuring that businesses navigate the turbulent seas of customer risk safely. Join us on a journey through Simplified Due Diligence (SDD) as we explore how it can illuminate the path for various industries in 2024.
Demystifying Simplified Due Diligence
Imagine due diligence as a multifaceted shield against the unknown. It’s the process that evaluates the risks posed by customers before they can open bank accounts or access services. Without this safeguard, malevolent actors could infiltrate, wreaking havoc by
pilfering sensitive financial information, incurring legal penalties, and triggering sanctions that could ultimately cast businesses into permanent exile from the corporate realm.
Depending on the specific context, businesses employ due diligence measures. For cases of minimal or low risk, where the full due diligence process is not warranted, we have what’s known as Simplified Due Diligence (SDD). SDD is the streamlined, straightforward version of due diligence aimed at assessing lower-risk customers.
When and Where to Apply SDD
SDD finds its footing when the financial risk is minimal. It’s applicable to low and medium-risk customers, offering a balanced approach that doesn’t compromise on security. It doesn’t skip vital checks but rather streamlines the Customer Due Diligence (CDD) process, making it more efficient compared to the rigorous, time-consuming procedures.
When does SDD come into play? Well, imagine a customer involved in transactions amounting to, say, less than $100 to $500. In such cases, SDD steps in. If a customer surpasses these limits, they might need to undergo the full CDD process. Although SDD isn’t a universal solution and may not be suitable for all industries, it typically applies to specific customers. These can include:
· Financial institutions like banks, investment firms, and others, subject to money laundering and terrorist financing regulations, such as the European Union Anti-Money Laundering Directives (EU-AMLDs).
· Businesses accountable to community institutions that require balance checks and specific procedures.
· Authorized public authorities with publicly available data.
· Customers offer specific insurance policies, electronic money products, pensions, and more.
SDD vs. CDD vs. EDD (Enhanced Due Diligence): Understanding the Trinity of Due Diligence
In the realm of due diligence, there are three primary types, each tailored to the level of risk involved:
· SDD (Simplified Due Diligence): This is the simplest form, employed for low-risk entities dealing with low-risk products or services subject to money laundering. It requires fewer documents and involves risk assessment and continuous monitoring.
· CDD (Customer Due Diligence): CDD is the middle ground, used when an individual poses a medium level of risk or engages in moderate transactions. It’s mandated by regulatory bodies like FATF (Financial Action Task Force) and involves additional documents, checks against databases, and ongoing monitoring.
· EDD (Enhanced Due Diligence): EDD is the most comprehensive form of verification, typically used for high-risk customers or those involved in substantial
transactions. It requires additional information, screening against Politically Exposed Persons (PEPs) and sanction lists, and continuous monitoring.
Requirements for SDD
Not every customer qualifies for SDD. FATF, under Recommendation 10, mandates businesses to conduct CDD, including SDD, when:
· Forming a new business relationship.
· Dealing with a risk of money laundering or terrorist financing.
· Questions arise regarding customer identification data.
· Transactions exceed $15,000.
· Identifying lower-risk situations aligns with the assessment of overall ML/TF (Money Laundering/Terrorist Financing) risks on both a national and company-wide scale.
Eligibility for SDD
SDD eligibility isn’t universal and varies depending on jurisdiction and industry. It’s usually applied to individuals or entities posing lower risks in terms of terrorist financing, corruption, money laundering, or other illicit activities during business relationships. To be eligible, customers should engage in infrequent small transactions, with transparent funding sources. While the FATF offers a non-prescriptive list of instances when SDD may be required, it’s important to tailor the process to regional and global regulations, aligning with AML/CTF/CPF assessments and overall risk levels.
Navigating the SDD Process
The journey begins with the Customer Identification Process (CIP), a pre-onboarding verification step that gathers the necessary customer data for verification. This information includes names, addresses, and dates of birth for individuals, while business data may differ. Ensuring this information is accurate and verifiable is crucial, as it helps prevent identity spoofing and the use of fake documents.
Next, due diligence profiles are created for each individual based on their risk profile, determining the type of due diligence required. This decision considers factors like business ownership structure, occupation type, industry, compliance needs, and security requirements. This selection process considers jurisdictional and global requirements, resulting in a comprehensive risk assessment.
Upon assessing the risk, if the customer presents low to medium risk, the SDD process begins. This less detailed identity verification process may rely on public registries or data availability, and it can encompass Ultimate Beneficial Owners (UBOs) and business ownership structures. However, many companies still employ manual methods prone to errors and time-consuming processes. To simplify matters, it’s crucial to incorporate automated solutions, such as AI-powered KYC solutions that perform real-time verifications against public and private databases, delivering essential information swiftly.
The Journey Doesn’t End: Continuous Monitoring
The due diligence journey is an ongoing one. A customer who presents low or medium risk today might evolve into a threat tomorrow. This is where continuous monitoring becomes essential. Continuous assessments ensure that customers remain at low risk during their association with the company. Any suspicious activity triggers a risk flag, enabling companies to decide whether further screening is required.
Benefits of SDD
Simplified due diligence offers a range of benefits, which is why many businesses incorporate it as mandated by FATF. These advantages include:
· Time and Cost Savings: SDD simplifies the due diligence process, making it faster and more cost-effective by reducing the amount of data and documentation required.
· Enhanced Efficiency: Using a standardized process, organizations ensure that all due diligence is carried out uniformly, reducing errors and enhancing precision while streamlining procedures.
· Improved Customer Experience: By reducing the data and documents required, the SDD approach helps companies facilitate transactions and build business relationships more efficiently, thereby enhancing customer satisfaction and trust.
· Flexibility and Customization: The SDD process can be adapted to the specific needs of various industries and enterprises, allowing companies to tailor due diligence procedures to their unique requirements while complying with AML regulations.
How Will SDD Shape Industries in 2024?
The eve of 2024 is fast approaching, and SDD is poised to play a crucial role in numerous industries. Beyond regulatory compliance, it’s now a necessity for many sectors, and here’s how it will impact them:
· Digital Transformation Leading the Way: Due diligence is progressively shifting online, powered by advanced analytics, machine learning (ML), and artificial intelligence (AI) systems that automate data gathering, analysis, and risk assessment. These tools enable quicker and more extensive due diligence, facilitating better decision-making and risk mitigation.
· SDD as the Initial Screening Process: With growing cyber threats, organizations are placing greater emphasis on assessing the risks associated with new investments, partnerships, or acquisitions. Evaluating a target company’s SDD, data security policies, and incident response strategies is crucial in preventing costly data breaches and reputational damage.
· ESG (Environmental, Social, and Governance) Due Diligence Sets New Standards: Environmental, Social, and Governance (ESG) factors have gained
significance. Assessing a company’s CSR, diversity and inclusion practices, moral principles, and sustainability practices is now part of ESG due diligence.
· Country and Geopolitical Risk Assessment: Given geopolitical tensions and economic uncertainties, assessing country-specific risks is critical. Political stability, government institutions, economic data, and potential geopolitical concerns in the target market are now evaluated as part of the SDD process.
· Human Rights SDD Takes Center Stage: Human rights considerations are increasingly essential. Organizations are assessing the potential impact of associates or investments on labor standards, human rights, and supply chain efficiency, avoiding connections with parties implicated in constitutional violations or unethical practices.
A valuable companion in the world of due diligence is the SDD checklist. It’s a document outlining the steps necessary for businesses to meet due diligence requirements. Typically, it includes information to be collected from individuals or entities and the type of verification methods required. The checklist may vary based on regulatory requirements and industry specifics, encompassing elements like customer type, occupation, jurisdiction, product or service offerings, account type, and business structure.
For an effective SDD process, the union of technology and expertise is paramount. As technology evolves, so do customer risks and threats, making preparedness a necessity. FACEKI offers solutions tailored to financial and other organizations. Our KYC services perform real-time identity verification while adhering to global and industry compliance standards, ensuring the security of your business operations and trusted partnerships.
In conclusion, the voyage through Simplified Due Diligence is not only about compliance; it’s a quest for safer, more efficient business relationships in the digital era. As 2024 approaches, SDD’s significance will only continue to grow.