Simplified Customer Due Diligence

Simplified due diligence is due diligence with the intensity turned down, not switched off.

The IFSCA Guidelines build CDD in three settings off the customer's risk rating. A customer rated low risk may be given simplified CDD, which the Guidelines describe as modifying the ordinary CDD process — verifying later, updating less often, monitoring against a sensible threshold, inferring rather than asking why the customer is there.

The point is proportion. Spending the same effort on an employee pension scheme as on an offshore company with nominee shareholders wastes the effort that the offshore company needs.

And there is one absolute limit: simplified CDD shall not be conducted where there is a suspicion of ML/TF.

When it applies. Where the risks of ML/TF are low, a regulated entity may conduct simplified CDD measures commensurate with the low risk factors (Chapter 6, section 6.6). Section 6.2.1 frames it as modifying the ordinary CDD under clause 5.4 for a customer assigned low risk.

The Guidelines' examples of simplified measures.

1. Verifying the identity of the customer and beneficial owner after the business relationship is established
2. Reducing the frequency of customer identification updates
3. Reducing the degree of ongoing monitoring and scrutiny of transactions, based on a reasonable monetary threshold
4. Not collecting specific information on the purpose and intended nature of the relationship, but inferring it from the type of transactions or relationship

What can make a customer low risk — among other things: a government entity; a public company listed on a stock exchange and subject to disclosure requirements ensuring adequate transparency of beneficial ownership; a regulated financial institution outside India supervised for AML/CFT to FATF standards, or its qualifying subsidiary; a public body or publicly owned enterprise; a resident of a low-risk geographical area. Low-risk products include non-life insurance, life insurance with no investment return or surrender value, certain pension products, reinsurance ceded by a regulated insurer, and pension schemes meeting all three conditions — retirement benefits to employees, contributions deducted from wages, and no assignment of a member's interest.

The limits.

• Never where there is a suspicion of ML/TF.
• The presence of one or more low-risk factors may not always indicate low risk — the overall risk is examined.
• The PML Rules make the same point for the wider framework: simplified measures are not acceptable where there is suspicion, where specific higher-risk scenarios apply, or where the risk identified is not consistent with the national risk assessment.

Knock-on effect. Low-risk customers are updated once in every five years under the general periodicity (ten years for resident Indians with a Financial Group relationship in India).

Illustrative.

Narmada Life (IFSC) provides a group pension policy to Oceanic Shipping Pte Ltd's 420 seafarers. Retirement benefits go to employees; contributions come out of wages; the scheme rules forbid assignment of a member's interest. All three pension conditions are met, and the customer risk assessment rates the relationship low.

Simplified measures adopted.

Eighteen months later. Contributions jump to USD 310,000 in one month, paid not from the employer but from an unrelated trading company. The monitoring threshold throws it up. The moment the entity suspects ML/TF, simplified CDD is no longer available: it reviews the risk rating, applies full CDD and considers an STR. Simplified CDD was a judgement about a low-risk relationship — not a permanent licence for this customer.

Chapter 6 (IFSCA Guidelines for KYC Norms), section 6.6, lists the simplified measures and the suspicion bar; section 6.1.3 gives the low-risk indicators; section 6.2.1 links simplified CDD to a low rating; and Chapter 5, section 5.3(e), states the general principle of enhanced measures for high risk and simplified for low. Expect "which of the following is an example of simplified CDD?" and the true-or-false on whether it can be applied where there is a suspicion.

• Simplified is not exempt. It modifies CDD; it does not remove it.
• Never where there is a suspicion of ML/TF — this is the line the exam draws most often.
• "May", not "shall": low risk permits simplified CDD, it does not compel it.
• One low-risk factor is not conclusive. A listed company can still be high risk on the overall facts.
• The four examples: verify after establishment, update less often, monitor on a reasonable monetary threshold, infer purpose. Senior management approval is an enhanced measure, not a simplified one.
• All three pension conditions must be met for that product to count as low risk.