It is a very risky venture to engage in new business relationships because it all comes down to answering only one question, “is the customer or the organization really who they say they are?” Customer Due Diligence is the act of verifying a client’s identity by screening their information against restricted entities and negative lists to make sure that they are properly assessed before any business relationship is formed.
It is the first step in analyzing new customers, determining their trust-worthiness for protection against potential financial crimes like corruption and terrorism. However, this process is complex and leads to increased regulatory scrutiny, putting the company reputation at risk as well as monetary penalties, all which lead to customer dissatisfaction.
Levels of Customer Due Diligence
There are three levels of customer due diligence;
Standard due diligence – this applies to all clients without any exceptions.
Simplified due diligence – at this level, standard due diligence is not applied because clients fall under a certain category.
Enhanced due diligence – applies to all clients in circumstances which pose a very high financial risk like money laundering or if a client fails to physically avail him/herself for identification. Extra steps like gathering and verifying additional documents are taken in order to enhance due diligence.
Measures of Customer Due Diligence
The measures of CDD are outlined below:
The first step is to identify and verify the customer’s identity by using all databases available. The databases should be reliable to make sure that no single information that can be fatal to the business relationship is missed.
After customer identity verification, the beneficial owner’s identity should be verified so that companies recognize both the ownership and control structure of potential clients.
It is crucial to understand the business relationship to be formed between the company and the customer. All necessary information about the reason and nature of the relationship should be acquired e.g. details about the customer’s business endeavor, the types of activities to be undertaken and the extent of the business relationship.
Due diligence does not end when transactions start. On the course of the business relationship, all transactions are scrutinized to make sure that there is consistency with what the company knows about the customer as well as their financial and risk information in order to track any suspicious transactions. Also, it helps keep updated information on the customers to revise their risk assessment in case situations change.