Customer Due Diligence in Banking & How AI is Transforming it

TL;DR:

• CDD plays an important role in reducing the risks of money laundering, fraud, and financing of illegal activities by enabling banks to assess customer risks in real-time.
• Banks apply different levels of CDD depending on the customer’s risk profile—Standard Due Diligence (SDD) for low-risk customers, Enhanced Due Diligence (EDD) for high-risk customers, and Simplified Due Diligence (SDD) for minimal-risk customers like government agencies.
• AI is enhancing CDD with real-time data analysis, improved risk assessments, faster identity verification using biometrics, and reduced false positives, streamlining the due diligence process.
• Arya AI simplifies CDD for banks by automating KYC extraction, document fraud detection, and bank statement analysis, helping financial institutions onboard customers faster while mitigating fraud risks.

Doing business with your customers should make you money, not expose you to financial risks. By following customer due diligence (CDD), banks can do business risk-free.

Banks must assess risks accurately and in real-time, and go beyond manual checks and basic identity verification. Customer Due Diligence (CDD) is crucial in banking as it lowers the potential risks of money laundering, fraud, and financing of illegal activities. Leveraging Artificial Intelligence (AI) can transform how banks manage their customer due diligence process.

This blog explores the role of CDD in banking, its types, requirements, the transformative power of AI in this space, and how Arya.AI can make all the difference.

What is CDD in Banking?

Banks need to know their customers and ensure they are who they claim to be, as “high risk” does not always translate to “high reward” in banking.

To protect banks from money laundering, global regulatory bodies including the Financial Action Task Force (FATF), have mandated banks to implement robust CDD processes.

Customer Due Diligence involves gathering information about the customer with the goal of:

• Assessing a customer’s risk profile.
• Understanding the purpose and nature of their financial transactions.
• Ensuring the customer is not involved in illegal activities.

This level of scrutiny is necessary to prevent banks from unintentionally becoming an accomplice to crimes like money laundering or fraud. By conducting customer due diligence, banks can protect their reputation and avoid being fined for their customers' illegal activities.

Different Types of CDD

Banks typically employ three levels of CDD depending on the risk profile of the customer:

1. Standard Due Diligence (SDD)

Standard Due Diligence is the baseline level of scrutiny applied to customers with a low-risk profile. This level involves gathering basic identifying information such as the customer’s name, address, and date of birth, and verifying it through reliable sources like government-issued ID and proof of residence. SDD is commonly used for customers who have a transparent financial history.

Use Case:

A bank is onboarding a new customer who wants to open a standard savings account. The customer has no history of suspicious activity, operates within a low-risk country, and conducts regular, transparent financial transactions.

2. Enhanced Due Diligence (EDD)

For high-risk clients such as politically exposed persons (PEPs), high-net-worth individuals (HNIs), those engaged in complex or large financial transactions, or clients from countries with higher risk ratings, Enhanced Due Diligence (EDD) is required.

EDD is a more rigorous process involving a detailed assessment of the customer’s background, financial activities, and potential exposure to illicit activities. It may involve investigating the source of the customer’s wealth, identifying beneficial owners of business accounts, etc.

Use Case:

A bank is reviewing an application from a foreign high-networth individual (HNI) operating in a high-risk jurisdiction with weak anti-money laundering (AML) regulations. The client is involved in high-value international transactions and has complex ownership structures.

3. Simplified Due Diligence (SDD)

Simplified Due Diligence is done for low-risk customers.

Public sector organizations, listed companies, or institutions subject to stringent regulatory oversight come under this customer category as they pose minimal risks.

The bank verifies the organization’s legal status and the authority of its representatives to open and manage accounts while ensuring timely monitoring.

Use Case:

A bank is opening an account for a local government agency or a publicly listed company that is heavily regulated and operates transparently. Since the customer has a clear track record, a Simplified Due Diligence is applied in this case.

Four Requirements for Customer Due Diligence for Banks

Each country has unique regulations. This means that depending on a bank’s country of operation, different CDD rules may apply to them.

Typically, banks must meet four critical requirements to comply with CDD regulations. This includes:

1. Identify and verify the identity of customers by gathering the customer’s full name, date of birth, and address, and verify this information using reliable documents.
2. Identify and verify the identity of the beneficial owners of companies opening accounts.
3. Understand the nature and purpose of customer relationships to develop customer risk profiles. Then categorize customers into different risk profiles to determine the level of due diligence that will be needed.
4. Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information.

Checks Carried Out as Part of CDD in Banking

As part of the customer due diligence process, banks conduct various checks to ensure that they fully understand their customer's backgrounds and risk levels. These checks include:

• Conduct basic customer due diligence: Before starting a business relationship, banks verify their customers as part of the Know Your Customer (KYC) regulations. Banks can check the authenticity of a customer's ID online during the onboarding. Alongside confirming identity, banks look into the customer’s financial background and business activities.
• Select any third parties: Banks often work with third-party entities such as lawyers, auditors, or providers of CDD solutions to conduct customer due diligence.
• Decide if enhanced due diligence (EDD) is needed: Banks will conduct an enhanced due diligence (EDD) check if they are entering into a business relationship with high-risk customers such as:

1. A politically exposed person (PEP)
2. The transaction involves a person from a high-risk country
3. Another situation where there’s a high risk of money laundering

• Secure all record-keeping: By law, businesses must keep a record of all financial transactions for at least five years. This includes any information collected during the due diligence process, account files, business correspondence, and related analysis. It’s important to securely store this information, as it’s often sensitive and should not be lost or leaked.
• Maintain up-to-date records: If there’s a change in ownership or structure of a customer’s business, banks need to update their risk assessment and perform new due diligence.

How AI is Transforming CDD

Artificial Intelligence is revolutionizing CDD in banking by automating and enhancing many time-consuming processes that were previously done manually.

Here are some ways in which AI is transforming CDD for banks:

1. Real-time Data Analysis: AI-powered tools analyze vast datasets in real-time and identify patterns, anomalies, and suspicious activities that would otherwise go unnoticed. This speeds up the CDD process and improves accuracy.
2. Improved Risk Assessment: By leveraging ML algorithms, AI systems can continuously update customer risk profiles based on real-time data. This may reflect changes in behavior or new regulatory requirements.
3. Faster Identity Verification: AI-powered solutions use biometrics, facial recognition, and document analysis to verify customer identities more quickly and accurately.
4. Reduced False Positives: Traditional CDD processes often flag too many false positives, requiring manual investigation that takes too much time. AI systems can help by improving the precision of risk assessments.

Smart Onboarding with Arya AI

Customer due diligence for banks can be made simpler with Arya AI.

Arya AI provides AI-powered onboarding solutions that allows financial institutions to onboard customers without friction and erect sophisticated fraud detection methods to mitigate fraud. Smart onboarding with Arya AI automates identity verification, compliance checks, and customer profiling.

Some key features of Arya AI include:

• AI-driven KYC Extraction: Automates the collection and verification of customer information, reducing onboarding time from days to minutes. Arya AI retrieves information from government IDs such as a PAN card, AADHAR card, voter ID, passports, driving license, etc.
• Document Fraud Detection: Leveraging AI algorithms and pattern recognition, Arya AI can analyze government IDs, passports, invoices, and more, to identify anomalies and inconsistencies that may indicate fraud.
• Bank Statement Analyser: Leveraging AI and NLP, Arya AI auto-reads transactions from any bank statement to spot rare anomalies and identify tampered transactions. This helps banks accurately assess the creditworthiness of a customer.

Conclusion

Customer Due Diligence is essential for maintaining the integrity of the banking system and ensuring compliance with regulatory standards.

With Arya AI, banks can efficiently meet their CDD obligations and provide a better customer experience through faster, more accurate verification processes. As AI continues to evolve, its impact on CDD and banking will only grow, making the future of financial compliance smarter and more secure.

Ready to transform your customer onboarding process? Explore how Arya AI can automate customer due diligence (CDD) so you remain protected from financial risks.