Compliance does not always need to be complex. Simplified Due Diligence (SDD) provides an alternative, more streamlined route for companies handling customers or transactions that pose a lower risk of money laundering or terrorist financing. Instead of following a cookie-cutter due diligence strategy, SDD enables organizations to customize their compliance processes, directing their resources where risks are highest and reducing efforts where risks are low.
This blog discusses how a risk-based approach to compliance not only serves to fulfill compliance requirements but also boosts operational efficiency.
What is Simplified Due Diligence (SDD)?
Simplified Due Diligence (SDD) is a lower standard of customer identification used where the risk of terrorist financing or money laundering is minimal. It is one aspect of a wider risk-based strategy under the Anti-Money Laundering (AML) rules. SDD enables companies to gather less information than full due diligence, provided the customer or transaction is deemed low-risk. It is typically used for low-value transactions or customers with an open ownership structure.
Difference between SDD, CDD, and EDD
SDD (Simplified Due Diligence):
- A less intensive form of due diligence is applied to low-risk customers.
- Generally used to cover low-risk financial instruments or small transactions.
- Calls for minimal verification and may not even require extensive customer information.
CDD (Customer Due Diligence):
- A standard process is used to assess the customer’s risk.
- This involves verifying the customer’s identity, establishing the purpose of his business, and identifying his financial activity.
- Applied to most financial transactions and is the central due diligence procedure under anti-money laundering (AML) procedures.
EDD (Enhanced Due Diligence):
- A more thorough investigation is applied to high-risk customers or transactions.
- Involves deeper background checks, monitoring of financial activities, and additional documentation requests.
- Generally necessary for clients engaged in riskier industries, politically exposed persons (PEPs), or having complicated financial setups.
Importance of SDD in Compliance
- SDD (Single Data Delivery) streamlines complicated compliance procedures, making data management easier. By aggregating data delivery in a unified streamlined process, institutions can eliminate redundancies and reduce errors, allowing for smoother operations.
- SDD saves institutions money by eliminating redundant steps in the process, thus reducing operational expenses. By automating the submission of data through SDD, manual intervention is minimized, and time is saved, enabling employees to concentrate on core activities.
- SDD keeps institutions in compliance with regulations by automating and standardizing regulatory body data delivery. It makes it easier for institutions to meet regulatory deadlines, thus evading penalties for non-compliance.
When to Apply SDD
- Identifying Low-Risk Customers: Low-risk customers typically include individuals or entities with a transparent ownership structure, well-known public companies, government bodies, or financial institutions subject to robust AML regulations.
- Geographical Location’s Role in Risk Assessment: Customers whose country of origin has effective anti-money laundering laws and enforcement are usually lower risk, whereas customers whose country of origin is high risk may require enhanced due diligence instead of SDD.
- Testing of Transaction Nature: Regular, low-value transactions in line with the customer’s business activity and profile are likely to be low risk and may qualify for SDD, while those that are periodic or high value may be indicative of higher risk.
Integrating SDD with Digital Solutions
- KYC Process Automation: Combining Simplified Due Diligence (SDD) with technology facilitates the automation of Know Your Customer (KYC) processes, minimizing human effort and accelerating customer onboarding.
- Improving Efficacy and Efficiency: Digital solutions automate data gathering, validation, and analysis, improving the efficacy of compliance verification while dramatically increasing operational efficiency.
- Risk Management through Technology: Sophisticated technologies such as AI and machine learning enable the detection of low-risk customers, tracking transactions in real time, and compliance with regulations, hence mitigating likely risks.
Internal Controls for SDD
- Risk Understanding Associated Risks: Identify and evaluate potential risks associated with reduced due diligence, including exposure to low-risk yet still susceptible customers, lack of continuous monitoring, or inadequate identity verification.
- Implementing Adequate Safeguards: Put in place proportionate internal controls, like automated transaction monitoring, periodic reviews, and exception reporting to detect unusual behavior even in low-risk scenarios.
- Ensuring Compliance Without Compromise: Align SDD practices with regulatory requirements while maintaining operational efficiency—ensuring that simplified processes still meet the core principles of anti-money laundering (AML) and counter-terrorist financing (CTF) obligations.
Role of SDD in Anti-Money Laundering (AML) Practices
- Supporting Broader AML Strategies: SDD enables financial institutions to allocate resources to higher-risk customers by lighter due diligence in areas where money laundering risk is lower. By minimizing the compliance burden on low-risk cases, SDD facilitates broader coverage and improves overall AML program efficiency.
- Balancing Compliance and Risk: SDD balances compliance with AML regulations with the need to prevent unnecessary checks on low-risk customers, thereby ensuring customer convenience and operational efficiency. It balances preventing financial system misuse and over-regulation, which would stifle legitimate business or financial inclusion.
Conclusion
Simplified Due Diligence (SDD) enables companies to simplify compliance procedures by prioritizing low-risk profiles, and minimizing operational burdens without sacrificing regulatory strength. By adopting a risk-based strategy, firms can better target resources, allowing due diligence activity to be proportionate to the risk level involved.
Deepvue.tech provides APIs that are perfectly complementary to SDD:
- Identity Verification API – Verify Aadhaar, PAN, and more instantly.
- Bank Account Verification API – Verify bank account information instantly.
- Account Aggregator API – Get a consolidated picture of financial information.
FAQs
What is SDD in due diligence?
Simplified Due Diligence (SDD) is a simplified procedure for low-risk customers involving fewer checks on identity and verification than normal due diligence.
What is a risk-based due diligence approach?
A risk-based strategy adjusts the amount of due diligence to the level of risk for a customer or transaction, prioritizing resources where there is a greater risk of money laundering or fraud.
What are the 4 pillars of the risk-based approach?
These four pillars are: Customer Risk, Product/Service Risk, Geographic Risk, and Delivery Channel Risk—each serving to measure and control exposure to compliance risks.
What is a streamlined due diligence policy?
An easy-to-understand due diligence policy establishes guidelines and processes for using diminished checks for low-risk customers and maintains compliance without overloading operations.
