What is Customer Due Diligence? A Practical Guide for Businesses

It is becoming important for businesses and the financial institutions to understand their clients and the risks they bear in today’s complex world of finance. This is a significant process also known as customer due diligence CDD which acts as a compliance measure which is now very common in the management of risk. 

What is Customer Due Diligence?

A customer due diligence program serves as the foundation of efforts to combat money laundering, thus making it a critical component of a financial sector’s regulatory and stability requirements.Such companies can thereby protect themselves from being able to dissect the activities of their clients, thereby enhancing their business stability. 

Knowing who the customers are and what customer due diligence is, the latter being particularly relevant to banks, allows businesses to accept the necessity of maintaining customer due diligence strategies and practices. 

In this blog, we will explain the meaning of customer due diligence, its essential elements, and how the process works. We will examine what customer due diligence entails, describing the procedures which companies are in a position to adopt to carry out the due diligence processes effectively. The importance of Enhanced Due Diligence (EDD) while handling high risk clients (HRC) will as well be covered with regards how increased effort is mandatory to address impending risks.

Lastly, we will examine the latest technological innovations in relation to customer due diligence and how these inventions can be used to improve CDD with reference to banking services. This practical guide aims to help organisations with enough and detailed information on how to manage CDD requirements effectively, providing a safer and more compliant financial environment.

The Customer Due Diligence Process

Initial Identification and Verification

1. Verification of Identity: This process consists of identifying information such as passports or driving licence which the customer submits in order to conduct identity verification.
2. Assessment of Business Relationship: The why and how of a business relationship is significant and captures for example beneficial ownership and the control structure of the related entities.
3. Business Relationship Assessment: It is essential to understand the purpose, nature, and structure of a business relationship before accessing it. For example, it is necessary to identify beneficial owners and assess the head of the relevant company. 

Risk Assessment and Profiling

1. Evaluation of Risk Factors: Risk classification is based on factors such as the country of residence of the client, their business, the amount of transactions and their conduct.
2. Customer Risk Profiles: Depending on the first evaluation, clients are assigned to certain risk profiles (low, medium or high) at which depending on the level of due diligence abiding is necessary.
3. Enhanced Due Diligence for High-Risk Customers: When more aggressive clients are known to be not the decent ones, more rigorous measures are required in terms of risk assessment to reduce further risk to clients. 

Ongoing Monitoring and Updating of Customer Information

1. Continuous Surveillance: The regular review of transactions performed for a customer to identify trends changes that are abnormal, hence suspicious behaviour.
2. Dynamic Risk Assessment: Customer risk profiles are not to be considered to be the end product and should be refreshed periodically to reflect the current risks based on customer behaviours and transactions.
3. Regulatory Compliance: All the procedures employed by the institution aim at the risk posed by clients and so recordkeeping supporting the CDD process is critical in ensuring that all the customers’ details are current and AML policies followed. 

Enhanced Due Diligence (EDD) for High-Risk Customers

1. Geographical Location: Additional risk-based measures will be applied to businesses operating in or having business relations with high risk countries on account of possible money laundering or sanction breach activities, dual business concern.
2. Nature of Business: The exposure posed by the volume and the type of business transacted in certain markets, such as gambling or private banking, puts these sectors at a high risk level.
3. Transactional Patterns: Higher risks can also be associated with unusual or complex types of transaction patterns which are not normal.
4. Customer Relationships: The involvement of politically exposed persons (PEPs) or controlling persons of complex business structures requires special treatment.

In-depth Verification and Monitoring Processes

1. Verification of Identity and Background: Obtaining additional data on the individual’s identity and checking for any ties with criminal organisations through relocation and/or additional record checks.     
2. Monitoring Transactional Behaviour: Ongoing transaction surveillances are done to find those that have signs of abnormal behaviour and other recurrent signs of illegal activities.
3. Adverse Media Screening: Media sources need to be checked on a regular basis to look for information which implicates the customer in criminal activities or suggests that he has a bad reputation.
4. Beneficial Ownership Checks: Risk in terms of indirect control or ownership can be addressed through identifying and authenticating beneficial owners.

Legal and Compliance Implications

1. Regulatory Requirements: Adherence to international standards such as the Financial Action Task Force (FATF) guidelines and local anti-money laundering (AML) laws.
2. Record-Keeping: Maintaining detailed and accurate records of all EDD measures applied, including customer information, verification processes, and monitoring findings.
3. Reporting Obligations: Mandatory reporting of suspicious activities to relevant financial intelligence units to comply with legal requirements.
4. Ongoing Compliance: Regular updates and reviews of EDD policies and procedures to ensure alignment with evolving regulatory landscapes and emerging risks.

Technological Advances in Customer Due Diligence

Automated Identity Verification Tools

1. Streamlined Verification Processes: Our effective AML compliance Solution and customer due diligence system allow companies to mitigate financial as well as reputational risk. KYC and AML compliance improves customer experience by offering a frictionless onboarding process.
2. Comprehensive Database Utilisation: IDMERIT UK’s AML Monitoring Screening Software allows you to screen customers against global watchlists. Sanctions lists give you access to one of the world’s largest databases of criminal risk profiles to track politically exposed persons (PEPs).