Customer Due Diligence (CDD) is the process of verifying the identity of customers before establishing a business relationship with them as well as assessing their risk level. CDD assists businesses to manage risks of financial crime which include money laundering and terrorist financing.
Criminals launder money mainly using the financial system to transfer funds. Financial institutions, especially banks, are most vulnerable to abuse for laundering purposes. To protect themselves, financial institutions must have adequate controls and procedures in place that enable them to know the person whom they are dealing with. Enhanced due diligence on new and existing customers is a key part of these controls.
The application of thorough Customer Due Diligence (CDD) measures by financial institutions and a high degree of transparency is crucial to fight money laundering and the financing of terrorism effectively. Customer Due Diligence should be applied upon the establishment of a business relationship. Enhanced Due Diligence should also be applied where there is a receipt of a significant cash amount above normal threshold receipts. Customer Due Diligence measures should also be applied whenever financial institutions suspect money laundering or terrorist financing activities.
The Legal Framework for Customer Due Diligence in Kenya.
In Kenya, CDD is a legal requirement under the Proceeds of Crime and Anti-money Laundering Regulations, 2013. Under the regulations, reporting institutions which include banks, insurance companies, and microfinance institutions must undertake due diligence procedures before establishing a business relationship.
Specifically, institutions are required to identify customers using independent source documents, data, or information, verify the identity of beneficial owners and conduct ongoing due diligence on the business relationship to ensure that transactions being undertaken are consistent with the financial institution’s knowledge of the customer, their business and risk profile.
Importance of Customer Due Diligence for Financial Institutions in Kenya
One of the key benefits of conducting customer due diligence is the protection of the institution against reputational risk. Another benefit is the maintenance of customer trust. Lastly, CDD ensures the avoidance of regulatory fines and penalties. In Kenya, a reporting institution that contravenes the provisions of the regulations commits an offence and is liable to a fine not exceeding five million Kenya shillings or imprisonment for a term not exceeding three years or both.
Riskhouse International Limited assists organizations to examine the effectiveness of their Anti-money laundering and Combating Financial Terrorism programs by offering AML/CFT Health Checks, KYC Diligence, Screening, and Remediation, AML/CFT Analytics, Monitoring, and Investigation, and AML/CFT Training and Awareness.
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