What is Customer Due Diligence and What is its importance?

Behind the smiling faces of the relationship managers greeting you generously, is a history of a systematic vetting carried out about you. Well, there is nothing wicked behind this considering the fact that engaging in a new business relationship is risky for businesses when we live in a world of frauds, impersonation, money laundering and terrorism. It is naturally difficult for banks to ascertain your claim of being who you say you are before they hand you over the money. In business terms, this process is more commonly known as ‘Customer Due Diligence’.

What is Customer Due Diligence?

Customer due diligence (CDD) is a process used by financial institutions and other regulated businesses to identify and assess the risks associated with a customer or client, particularly the threat of money laundering or financing terrorism. The goal of CDD in banking is to gather and verify sufficient information about a customer or client to determine their identity and assess their potential risks to the business. This can include verifying the customer's identity, reviewing their financial history and transactions, and analyzing their business activities and relationships.

We, as individuals, also perform due diligence knowingly and unknowingly. From going out to a new restaurant, planning a holiday, and even searching for jobs, we seek maximum data to help us confirm the information. For businesses, a sophisticated process is developed to verify your identity called Customer Due Diligence. In short, due diligence is performing background checks on the customer to ensure they are properly risk assessed before being onboarded. Customer Due Diligence enables an organization to evaluate the extent to which the customer exposes it to various risks. 

When Should Businesses Carry Out Customer Due Diligence?

Due diligence, as we know, is an audit of a potential investment or product to confirm all facts, that might include the review of financial records. Most companies research before entering into an agreement or a financial transaction with another party for the following reasons:

  • Entering a new business deal:

    Companies must perform thorough due diligence prior to establishing a business relationship in order to ensure the customer matches their risk profile and isn’t using a false identity.
  • In the case of Infrequent dealings:

    Certain transactions are not regular but still require implementing CDD measures. These might include dealings where an amount over a certain threshold is involved or when the entities are located in high-risk foreign nations.
  • When suspecting money laundering:

    If a customer is suspected of money laundering or financing terrorism, companies must implement CDD checks.
  • When the documentation is not reliable:

    When the identification documents that the customer has furnished are either unreliable or inadequate, companies should apply further CDD investigation.

Levels of Customer Due Diligence

Depending on the type and circumstances of a business dealing, there are two broad levels of customer due diligence among several others, viz:

1. Simplified Due Diligence:

This is the lowest level of due diligence that can be completed on a customer who does not always pose a high risk to the organization. The customers have less probability of being involved in money laundering or terrorist financing.

2. Enhanced Due Diligence

Enhanced Due Diligence or EDD is required when a customer is perceived to be at a higher risk to the company. A high-risk situation also occurs where there is an increased opportunity for money laundering or terrorist financing through the service or product you are providing. Examples of higher risk customers may include politically exposed people, customers with suspicion of terrorist activities, non-face to face account opening and customers located in high-risk locations.

The Customer Due Diligence Process

Customer due diligence is an important aspect of a financial institution's risk management and compliance with anti-money laundering (AML) and Countering Financing of Terrorism (CFT) regulations.

The customer due diligence process typically involves the following steps:

Identify the customer:

This involves collecting information about the customer's identity, including their full name, date of birth, address, and identification documents.

Verify the customer's identity:

This involves verifying the information provided by the customer using reliable and independent sources. This may include checking identification documents, such as a passport or driver's license, against a database or cross-referencing the information with public records.

Assess the customer's risk profile:

This involves evaluating the customer's risk for money laundering or financing terrorism based on various factors, such as financial history, business activities, and geographic location.

Monitor the customer's transactions:

This involves ongoing monitoring of the customer's transactions to ensure that they are consistent with the customer's known financial profile and risk profile. This may include reviewing the customer's account activity, monitoring transactions, and reporting any suspicious activity to the relevant authorities.

The customer due diligence process is an important tool for financial institutions to prevent financial crime and maintain compliance with regulatory requirements. It helps to ensure that financial institutions are not being used to facilitate money laundering or financing terrorism and helps to protect the financial system’s integrity.

If you are thinking of onboarding a new customer or want to acquire another small business or you simply want to add new suppliers to your business, CRIF can perform the right Customer Due Diligence for you!