Tiered Due Diligence refers to a risk-based approach to Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, where the intensity and scope of background checks on clients vary according to their assessed risk profile. In crypto, this means high-risk clients (e.g., those with large transaction volumes, from high-risk jurisdictions, or complex corporate structures) undergo more rigorous scrutiny than lower-risk clients. This method optimizes resource allocation while maintaining regulatory compliance.
Mechanism
The mechanism involves an initial client risk assessment at onboarding, categorizing clients into distinct risk tiers (e.g., low, medium, high). Each tier has a predefined set of due diligence requirements, ranging from basic identity verification for low-risk clients to enhanced due diligence (EDD) measures, such as source of wealth verification and detailed transaction monitoring, for high-risk clients. Automated systems manage the workflow, ensuring the correct level of scrutiny is applied.
Methodology
Implementing tiered due diligence requires a robust risk scoring system that factors in multiple variables, including client type, geographic location, transaction patterns, and nature of business. The methodology involves regularly updating risk assessment models, conducting ongoing monitoring of client activity to detect changes in risk profiles, and periodic reviews of all client categories. This systematic approach allows crypto platforms to efficiently comply with regulatory obligations without imposing unnecessary burdens on all users.
A risk-based approach shifts due diligence from static counterparty verification to a dynamic, tiered assessment of the omnibus account's specific risks.
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