Customer Due Diligence (CDD) is at the heart of Anti-Money Laundering (‘AML’) and Know Your Customer (‘KYC’) initiatives and forms a crucial part of any business’ risk management and compliance processes.
It is designed to help organisations such as banks and financial institutions, prevent financial crimes like money laundering, terrorist financing, human and drug trafficking and fraud.
The process enables an organisation to collect and evaluate relevant information about a client or potential client (individual or entity) that is looking to do business with them.
Fundamentally, due diligence enables you to identify, verify and determine whether to enter into a business arrangement with a particular individual or entity.
It is a vital process through which you can check that the respective party and what they do does not post a potential risk or threat to your organisation, by identifying any possible issues and/or red flags that could affect your organisation in the short or long-term.
There are a number of benefits to having proper CDD procedures and processes in place, including:
• Protection for the organisation
• Helps when trying to make decisions in the best interest of the business
• Safeguards the organisation from deception and malpractice
• Ensures that the organisation complies with current laws and regulations
• Creates a complete customer profile
• Helps to identify unusual client behaviour that might pose a risk to the organisation
When conducted in the right manner, CDD can create greater awareness, clearer expectations and paint a fuller picture of an individual or entity so that you can make key business decisions easier.
CDD comprises information about an individual or entity. At a basic level, it requires you to collect a customer’s name, address and information about their business.
Such data includes:
Client Information – It is crucial to ensure that any prospective client is who they say they are. You should identify a client by obtaining personal information and data i.e. full name, address, date of birth etc.
Background checks – PEP screenings, sanction checks, adverse media searches. Understanding the nature of an individual and the purpose of an entity can help to determine an overall risk profile and consequently whether or not to take on the business.
Beneficial Ownership – Where the client is an entity, it is important to establish who the ultimate beneficial owner is. This refers to the individual(s) that ultimately owns and benefits from the activities of a person, group of persons or entity; there may be more than one beneficial owner. Such information should be reviewed and updated regularly to ensure that the correct information is kept on file at all times and that any local obligations for recording of the same are met.
Business Relationship – It is important to establish the nature and purpose of the business relationship your organisation is entering into. What is the extent of the organisation’s relationship with the client and what will be its role and responsibilities?
Upon collating this data, the information provided must be verified using supporting official documentation i.e. passports, drivers licenses, utility bills and statutory documents.
The screening process can vary depending on which stage the business is at. The main three screening types are:
On Boarding: Prior to commencing a business relationship, you should establish the identity and business activities of any potential client.
Ongoing: Regular screening of existing business partners or relationships to identify unforeseen issues and ensure that any CDD held remains to be accurate and up to date.
Enhanced: Where a high-risk client is identified, the organisation may determine that enhanced CDD measures are required. Enhanced screening adds a higher a level of scrutiny when it comes to client information, the nature and purpose of the relationship and ongoing monitoring requirements. It can include investigation into a client’s legal matters, source of wealth and source of funds, financial and tax matters, and the ownership and ongoing control of their business.
High-risk clients can include politically exposed persons (PEPs) and sanctioned individuals.
CDD does not start and end at onboarding – you should carry out CDD procedures for the duration of all business relationships and on a regular basis.
Ongoing monitoring enables you to identify any unusual activity that may not have initially presented themselves as suspicious but do now.
It refers to the continuous checking of business activity and transactions to ensure that your understanding of the client and their business matches their behaviour, business and client risk profile. When doing so, be sure to record and keep any relevant documents and information pertaining to any suspicious activity or that, which is needed for CDD purposes.
Do not rush the process and ensure that it is conducted by an individual who is knowledgeable and experienced in order to ensure that it is done efficiently and effectively.