How to Audit Know Your Customer (KYC) and Customer Due Diligence (CDD)

Sohail Akbar

The purpose of this white paper is to illustrate the importance of KYC/CDD and the role of auditors in ensuring that the required testing is performed, issues uncovered during audit are remediated prior to the regulator’s examination or the financial institution (FI) falling victim to the perpetrators of money laundering and terrorism financing. Proper KYC/CDD ensure and unveils the true identity of customer specially UBO’s in simple as well as in complex structures of entities such as off shore, FZCO and companies set in secrecy heaven where the rights to monitor, control and dispose funds on behalf of true owners, are given to legal persons such as lawyers, and trustees etc. Auditing FIs KYC/CDD process using modern techniques determines that the desired results have been achieved from KYC/CDD as it subsequently impacts sanctions screening and transaction monitoring, if a FI KYC/CDD program is not stringent the entire AML/CFT program can collapse and the FI will always remain vulnerable to regulatory and ML/TF risk. This paper also defines the controlled environments other than audit, how to identify and resolve issues and how to conduct risk assessment of audited entities of an organization in relation to CDD.

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