Getting involved in new corporate or private relationships poses some risks. From time to time, you may find yourself asking the same question: ‘Can I trust them?’ That’s where due (customer) diligence comes into play. Customer due diligence (CDD) is an investigation when an institution collects certain data about their potential client for self-protection against a variety of possible financial crimes.
If a customer has a high-risk profile, you will need to conduct enhanced due diligence (read as an extra-in-depth investigation). As a matter of fact, we carry out due diligence in multiple fields of our lives. We investigate potential employees, dates, getaway destinations, vacation activities, the city’s best restaurants, etc. Therefore, the fact that we want to know who we’re dealing with in the business sector (and whether we can trust them or not) is more than natural.
Customer Due Diligence: More on the ‘Why’ & ‘When’ Aspects
Customer due diligence is performed for the purpose of getting the gist of the potential risk one’s clients or partners may present. It’s interesting that in many countries, performing this sort of investigation before any cooperation between the two parties takes place is a legal obligation.
All in all, customer due diligence is a fundamental aspect of successfully managing one’s risks and the possibility to leave nothing to chance when it comes to the customers’ potential illegal financial activities. CDD is often alternatively referred to as KYC (know your customer).
Below, you’ll find more details on the reasons why CDD is so vital:
- it grants an institution the possibility to figure out if a client is engaged in fraudulent or illegal affairs prior to entering a business relationship with them;
- if the institution finds out that their potential customer is involved in any kind of fraud during customer due diligence, they are free to report the authorities about it and not do business with the criminal. If they fail to do so, the client’s criminal activity may be associated with that very institution;
- CDD allows the organization to confirm that the customer is financially capable of doing business with them.
Here are some of the most typical circumstances when CDD is needed:
- the beginning of a business affair: most companies conduct due diligence measures before engaging in new business affairs with potential customers;
- irregular payment processions: an investigation of the aforementioned kind is often conducted when a transaction is made in a high-risk foreign country, or the amount of money exceeds the established limit;
- criminal activity suspicion: CDD checks are obligatory if a client is suspected of any financial wrongdoing;
- untrustworthy documents: if a customer provides unreliable or somehow incorrect ID documents, CDD must be carried out.
How CDD Is Carried Out
Usually, the CDD process begins with giving an individual a specialized form or questionnaire to complete. The whole procedure is usually conducted in the following steps:
- the regular investigation: this involves identifying the customer, analyzing their financial capabilities, exploring their business background, and figuring out where their income comes from;
- third party choice: CDD often requires working with third-party sources (e.g., lawyers or inspectors). Naturally, choosing the most reliable third parties is paramount;
- extensive data verification: to perform a successful investigation, all the necessary files must be collected and verified. Any docs that provide a customer’s financial background are extremely helpful at this stage;
- determining if enhanced due diligence (EDD) is necessary: based on the previous steps, a reasonable conclusion must be drawn regarding whether the customer is high-rick and requires a comprehensive background investigation or not;
- ensuring that all the sensitive data is properly stored: all the information and files gathered throughout the previous stages must be kept confidential and stored for potential further reference.
Main Types of CDD
- standard: this type of investigation is performed by most financial institutions. It implies the customer’s identity verification and clearing up the source of their income;
- simplified: this analysis is usually related to customer identification. It is performed on clients that are very low-risk in terms of their potential involvement in illegal activities;
- enhanced: this procedure is conducted on customers who are suspected of criminal activities;
- ongoing: people’s financial backgrounds change over time, which means regular customer monitoring is a must. That’s where the ongoing CDD comes into play.
CDD: Rules & Standards
Because this verification procedure often has an obligatory legal base, companies must conform to certain rules when conducting due diligence. Find these rules below:
- client identification and audit: ensuring that the customer can be trusted is a must at this point;
- verification of the client’s beneficial ownership: a beneficial owner is someone taking responsibility for regulating a legal entity customer. This person must be identified and investigated before an institution enters a corporate relationship with the customer;
- investigation of the client’s business background: this helps define the risk profile of the client;
- regular client supervision and data update: the customer due diligence procedure is ongoing. It goes on even after the business affair begins. If the procedure reveals any suspicious activities, the appropriate authorities must be informed.
Where CDD Is Conducted
This sort of investigation must be performed in any financial organization or other entity that suggests long-term business cooperation with their clients. Such financial institutions as banks are in constant corporate relationships with the clients. Therefore, it’s natural that CDD for the purpose of saving time and resources is their regular practice. To make the procedure as hassle-free as possible, it is advised that financial entities follow the aforementioned rules as diligently as possible.
Cutting to the Chase
In a nutshell, CDD is a procedure that should be carried out properly and backed by the most solid sources. All the individuals involved in CDD must be aware of the process and realize how vital it is (and how severe the results may turn out to be). Only the best professionals should participate in the procedure to make sure the most accurate results are achieved. If you have anything to say on the topic, you’re welcome to get the discussion going in the leave-a-reply section below. Your two cents are highly appreciated.
