Client Onboarding and Know Your Customer
Customer due diligence as a process, not a form
Know Your Customer (KYC) is the umbrella term; customer due diligence (CDD) is the specific set of steps: identify the customer, verify identity using reliable independent sources, identify the beneficial owner, understand the purpose and intended nature of the relationship, and conduct ongoing monitoring. Enhanced due diligence (EDD) applies to higher-risk situations (politically exposed persons, correspondent relationships, high-risk jurisdictions) and involves additional measures such as source-of-funds and source-of-wealth checks and senior sign-off. Simplified due diligence is permitted only where risk is demonstrably low and must still include identification and monitoring.
Concepts to master
- Beneficial ownership: typically an individual owning or controlling above a stated threshold (commonly 25% of shares or voting rights) or exercising control by other means. Questions love the word "control" because it captures arrangements that avoid nominal ownership.
- Politically exposed persons (PEPs): prominent public functions, their family members and close associates. Risk continues for a period after the person leaves office.
- Timing: identity is normally verified before establishing the relationship; limited exceptions exist but must be managed with safeguards.
- Reliance on third parties differs from outsourcing: the regulated firm remains responsible.
Traps
Assuming a passport copy alone satisfies CDD, or that a corporate client requires no individual-level checks. Another common trap is treating all PEPs as automatically prohibited - the requirement is enhanced measures and senior approval, not automatic refusal.
Rule of thumb
If you cannot state who the customer is, who ultimately owns or controls them, and why they want the product, CDD is incomplete.