What’s the first thing you ask someone when you meet them? It’s probably their name – after all, understanding who someone is is central to being able to trust them. But when it comes to crypto transactions, the concept of identity becomes a little bit more complicated.
Customer Due Diligence or CDD refers to a process that assesses all of the risks associated with a client or relationship. This process includes carrying out Know Your Customer (KYC) checks, but also takes into account overall client conduct, and assesses transactions to determine if they are unusual, suspicious and require reporting to financial regulators.
CDD is a cornerstone for anti-money laundering (AML) compliance, and helps businesses to protect themselves from being used for criminal activity.
Companies that offer transactional services to customers through crypto usually have numerous reasons for carrying out CDD as part of their AML compliance and anti-fraud protocols. This includes ensuring that their services are not exploited for money laundering and other forms of criminal financing, and in order to comply with local and international financial regulations governing financial institutions (FIs) and virtual asset service providers (VASPs).
CDD measures for crypto companies may include:
- Know Your Customer (KYC): Crypto businesses should collect and verify customer information such as name, address, date of birth and nationality. By carrying out ID document Verification (IDV), companies can ensure that the data they gather on their prospective customers is genuine.
- Enhanced Due Diligence (EDD): This may be required for customers who are deemed to be high-risk, for example because they are from a country with weak AML controls, or they are conducting large or unusual transactions. EDD measures can include additional KYC checks, as well as researching the customer’s background and business dealings.
- Transaction & Ongoing Monitoring: Crypto businesses should monitor customer transactions for suspicious activity, such as patterns of small deposits followed by withdrawals in short periods of time, or frequent transfers to and from known addresses associated with criminal activity.
- Compliance with global watchlists (sanctions, PEP, adverse media): Crypto businesses must ensure that they do not deal with individuals or entities who are subject to sanctions, such as those imposed by the US Securities and Exchange Commission (SEC), Financial Action Task Force (FATF) or Financial Crimes Enforcement Network (FinCen), among others.
- Crypto Wallet Screening: By using proprietary wallet screening technology, crypto companies and exchanges can generate AML/KYC Risk Reports that evaluate the money laundering risk of blockchain addresses and their owners.
How does CDD relate to Know Your Customer (KYC) processes?
CDD measures have a lot of crossover with standard KYC processes, but they are designed to not only identify a customer, but also assess the risks they pose. By using a risk-based approach (RBA), potential customers (either individuals or corporates) can be classified according to a risk profile.
Depending on their risk profile, potential customers can then either be granted immediate access to your services, rejected due to being too high risk, or passed on for further CDD.
This can include additional KYC checks, as well as researching the customer’s background and business dealings. If CDD measures alone are note enough to ascertain a potential customer’s true risk profile, then they can be processed further using Enhanced Due Diligence (EDD), which takes a more detailed look at their profile, including adverse media searches and checks for their relationship to Politically Exposed Persons (PEPs) and sanctioned activity.
Benefits of CDD for businesses
CDD helps businesses to protect themselves from being used for or targeted by criminal activity, and is an important part of anti-money laundering (AML) compliance. It also allows businesses to build up a better understanding of their customers, which can be helpful for marketing and refining their product offerings.
Challenges of implementing CDD
One challenge of CDD is that it can be time-consuming and costly to carry out all the necessary checks and research, particularly for high-risk customers and if attempting to carry out the checks manually.
Another challenge is that the requirements can vary from jurisdiction to jurisdiction, so businesses need to be aware of the relevant regulations in each country where they operate. That said, by implementing an effective and efficient Automated KYC solution, businesses can rapidly and effectively carry out KYC and CDD on prospective customers without the need for large human compliance teams.
Risks of not implementing CDD
The main risk of not implementing CDD measures is that businesses may unwittingly be used for money laundering or other criminal activity. This could lead to costly fines and damage to reputation, the loss of funds through fraud, as well as legal and regulatory problems.
CDD Best Practices
- Implementing an RBA: This means carrying out more extensive checks on high-risk customers, and less extensive checks on low-risk customers.
- Gathering customer information from multiple sources: This helps to verify the information and gives a more complete picture of the customer.
- Keeping records of CDD measures: This helps to show that the measures have been carried out, and can be helpful if there are any future queries or investigations by regulators.
- Reviewing CDD measures regularly: This helps to ensure that they are up-to-date and remain effective.
How KYC-Chain helps to carry out CDD
CDD measures can be implemented using KYC-Chain’s end-to-end integrated KYC solution. KYC-Chain’s CDD module includes features such as risk assessment, document verification and sanctions screening, and can be used for both individual and corporate clients (KYB).
- Risk Assessment: KYC-Chain’s risk assessment tool allows businesses to assess the risks posed by a customer. This includes looking at factors such as the customer’s country of origin, transactions history and AML/CFT risk rating. Our Crypto Wallet Screening tool also checks wallet addresses against lists of wallets addresses that have demonstrated suspicious activity.
- ID Document Verification (IDV): KYC-Chain’s document verification feature allows businesses to verify customer documents such as ID cards, passports and utility bills.
- Watchlist Screening: KYC-Chain’s Wallet Screening uses a detailed Risk Score visualization that can help companies evaluate a wallet’s risk level according to up to six groups of risk indicators that are most applicable to the wallet, reducing the risk of providing crypto services to wallets that have a history of suspected fraud or criminal activity.
The benefits of using KYC-Chain for CDD
KYC-Chain offers a number of benefits for businesses looking to implement CDD measures, including:
- Streamlined process: KYC-Chain’s platform helps to streamline the KYC and CDD process by offering a seamless end-to-end workflow that can be fully integrated within your business’ API. This allows for frictionless onboarding that is safe, efficient and scalable.
- Reduced costs: Using KYC-Chain can help to reduce the costs of CDD by eliminating the need for manual checks and paper documents.
- Increased security: KYC-Chain allows crypto companies to protect themselves against fraud by ensuring the individuals and businesses they provide services to are who they say they are.
- Global coverage: KYC-Chain’s platform is available in over 200 countries, so businesses can use it to carry out CDD measures globally. In addition, our KYC/CDD processes check documents
Have a crypto project that should be implementing CDD? Get in touch and we’ll be happy to discuss how KYC-Chain can make it happen, and give your project the tools it needs to scale quickly and securely.