Customer due diligence: discover the benefits of adopting a risk-based approach

What is Special About a Risk-Based Approach to CDD ?

The money-laundering risks that can be posed by a publicly-listed company and a recently incorporated company operating in a country under increased monitoring do vary. Because fintechs and marketplaces face an expanding spectrum of money laundering threats, and modern financial criminals have a range of tools at their disposal to avoid countermeasures put in place to stop them, regulated entities must be able to respond to threats on a contextual basis to balance efficiency and cost needs with compliance obligations. The most effective way to achieve that objective is to take a risk-based approach, meaning an AML compliance program tailored to the individual levels of risk exposure that each customer presents.

When introduced in 2012 by the FATF, the aim of risk-based approach was to create an environment where measures to prevent or mitigate money laundering and financing threats are commensurate with the risks identified.

Risk-based approach is a more flexible and rational approach to KYC/AML, addressing the actual risks to which the application of AML controls was exposed, rather than simply ticking boxes hoping to satisfy the regulator

Why is a Risk-Based Approach to CDD Important ?

In practice, this means that customers may be classified individually by their risk exposure – based on their countries or geographic areas, shareholding structure, date of incorporation, business activity as well as the products and delivery channels

As a consequence of this categorization, customers will fall into three categories of customers:

• ‘Low risk customers’ are subject to simplified customer due diligence
• ‘High risk customers’ are subject to enhanced customer due diligence 
• All other customers are subject to standard customer due diligence

It is important that fintechs and marketplaces actually implement a risk-based approach to CDD for three reasons.

1. To onboard quicker customers subject to simplified and standard CDD. Why not take advantage of the simplified and standard CDD to conduct less checks and onboard customers more quickly ? Based on our experience, 60% of businesses can be onboarded in less than 15 minutes.
2. To minimize risk exposure. Ongoing monitoring is important because customers’ risk profiles can change over time. Fintechs and marketplaces must be able to react to new levels of risk exposure to ensure emerging money laundering threats are identified as quickly as possible.
3. To meet regulatory requirements. Designing and implementing a risk-based approach to CDD is a regulatory requirement. Because the implementation of an effective risk-based approach to CDD can be a challenge, Ondorse’s platform is here to help you.

How do I Conduct a Risk-Based Approach?

Ondorse is a highly customizable platform where you can implement and automate your risk-based approach to customer onboarding and customer monitoring. But how does it work in practice ?

1. With Ondorse, implement your risk-based approach by setting-up rules to your new and existing customer base.
2. Based on such rules, Ondorse will automatically tag your customer as a customer subject to standard, simplified or enhanced customer due diligence.
3. Based on the different types of customers, you can create differentiated verification workflows on the Ondorse platform that are tailored to your three categories of customers.
4. Depending on the risk profile of your customers, as a fintech or a marketplace, you may not have to refresh the KYB of your users every year, it may only be every two or three years. That way, you can better allocate customer monitoring costs.