What is simplified due diligence?
- Know Your Customer (KYC)
By SmartSearch
For financial institutions across the globe, safety and security are top priorities, and compliance with anti-money laundering laws and regulations is essential. In order to protect customers and your own business from threats of financial crime and terrorism, it’s your duty to conduct AML checks on each customer.
One important aspect of these checks is due diligence, but there are levels to these investigations that can be determined by the assessed threat level of a customer. In this blog, we’ll dive into Simplified Due Diligence, what this less stringent process involves and what to include in your Simplified Due Diligence checklist.
What is Simplified Due Diligence?
Simplified Due Diligence is a procedure used for customer verification that allows businesses to perform lighter due diligence checks if a business is deemed low risk of money laundering or financial terrorism.
SDD still means that important due diligence checks are carried out, but it allows companies to focus their resources on higher-risk clients whilst continuing to comply with regulations and screen customers.
Instead of assessing all customers at the same level, risk is decided based on:
- Who the customer is
- Where they’re based in the world
- The service or businesses they use
- Source of funds
With these checks carried out, you can determine if a customer is low risk. If they are, SDD can be used rather than standard or Enhanced Due Diligence.
When is Simplified Due Diligence used?
After conducting an initial risk assessment, you can decide if SDD can be used.
Low-risk customer scenarios include:
- Publicly listed companies and customers
- Government or state-owned departments
- Customers with low-value or low-frequency transactions
- Other financial institutions with AML frameworks in place
- Customers in countries with tight anti-corruption laws and strong governments
Conducting SDD should only occur if your customer meets these requirements during a risk assessment.
Simplified Due Diligence VS Standard and Enhanced Due Diligence
The main differences between simplified, standard and enhanced due diligence are the level of depth given to each investigation.
| Type | Procedures | Customers/ clients |
| Simplified Due Diligence | Standard identification procedures, with less frequent ongoing monitoring. | Regulated financial institutions or government bodies. |
| Customer Due Diligence | Full screening and ID verification. Regular ongoing monitoring. | Small businesses, retail customers. |
| Enhanced Due Diligence | Detailed checks, SOF and SOW verification, PEP screening and risk assessment. | PEPs and clients or businesses in high-risk jurisdictions. |
Key processes for your Simplified Due Diligence Checklist
In order to ensure your AML checks are still compliant, you need to know the key components of SDD.
Reduced Identity Verification
With reduced ID checks, there is no need for several documents and forms of ID to be provided. Instead, you can accept one form of trusted ID, like government-issued IDs that would have already undergone AML checks. You can also rely on IDs already verified on your system if the individual is already a client.
When using automated ID verification software like TripleCheck, there may also be no need for manual checks or verification.
Lighter Beneficial Ownership Checks
When risk is lower, you can still identify beneficial owners and stakeholders, but these identities can be confirmed with company registration details. External verification from regulatory databases can also be a sufficient investigation, alongside verifying if a company is publicly listed.
Reduced Ongoing Monitoring
Whilst ongoing monitoring should always be carried out at any level of due diligence, it can be less frequent or intensive with SDD. Database checks can be automated, and manual checks can be reduced. Alerts will still be created if significant changes in customer behaviour or alarming transactions are detected, but risk assessment can be periodic instead of constant.
Streamline Report and Record Keeping
Accurate record keeping is needed to ensure compliance and ongoing monitoring. To help simplify the process, investing in software that stores and updates customer information will avoid the need for manual filing and also allow smart AML monitoring systems to easily keep track of customers.
Simplified Due Diligence Regulations
Even looser due diligence procedures are still subject to strict conditions, and there are some expectations from compliance bodies:
- Document risk assessments and reasoning for rating customers as low risk
- Compulsory ongoing monitoring to ensure no suspicious activity is missed
- Correct escalation procedures and SAR processes for when or if risk levels change
- Continued compliance with current AML requirements
What Are the Benefits of Simplified Due Diligence?
Efficient Onboarding
SDD checks allow for quicker onboarding and save resources by reducing the need for manual customer checks. Simplified Due Diligence achieves this without compromising on compliance and safety.
Greater Customer Experience
If you’re a lower-risk client, facing smooth onboarding and fewer technical hurdles makes for a greater experience. If customers are faced with extended verification processes and document checks, this can discourage customers from returning or recommending your service, so SDD can help to retain customers.
Risk-based approach
Focusing resources and time on high-risk clients is the best way to ensure resources are utilised effectively. Only using further investigations and EDD when needed can help save businesses money, especially if you’re a smaller organisation.
The Best Practices for Simplified Due Diligence
To enhance your SDD procedures, there are several best practices your financial organisation should adopt:
- Automated risk assessment: Utilise AML software that automatically creates alerts and risk scores so that your team can decide if further investigation needs to be taken.
- Regular staff training: Each time a new regulation or trend related to financial crime emerges, you need to ensure all staff and compliance officers are up to date with the latest training and know how to tackle AML procedures.
- Regularly review the SDD framework: As new technology and processes continue to be introduced, adapting your business model will ensure you have the most effective SDD framework.
Make compliance simple at any level with SmartSearch
Conducting simplified due diligence isn’t about cutting corners with compliance checks; it’s about effectively and efficiently targeting resources where they’re most needed. By applying SDD to lower risk customers, your company not only upholds client relationships but also ensures the correct level of checks are being conducted.
With a strict monitoring and documentation process, you can ensure your simplified checks comply with regulations as they continue to change.
To stay ahead of new AML changes and to simplify due diligence checks, request a free demo of our comprehensive AML software at SmartSearch. To find out more about how we can streamline your checks, get in touch with our team today.
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