Conducting due diligence before getting into new business relationships is not just very important but also often required by regulation. Customer due diligence is a control procedure that establishes a customer's riskiness to the business. It involves obtaining information about a customer to understand their activities better. Activities of fraud, money laundering, and terrorism have been on the rise, and the total amount of money laundered every year makes up about
2% to 5% of the global gross domestic product. CDD is thus conducted to find out whether a customer is who they claim they are.
When Do You Need to Conduct Customer Due Diligence?
A good anti-money laundering/counter-terror financing program emphasizes CDD policies. AML necessitates that businesses should verify with whom they are conducting business. It does this by identifying the ultimate beneficial owner of a particular transaction.
Some of the instances that require CDD include:
- New customer relationships: Before committing to new business relationships, businesses should conduct CDD. This is to ensure that a customer matches their risk profile. New customers should be carefully examined to prevent admitting fraudsters in the business.
- Frequent transactions: This is where a customer makes the same transaction consistently. CDD is important in this case because it helps to identify fraudulent activities
- Inadequate documentation: A customer may not have enough documentation for a particular transaction. Further scrutiny is therefore important and this prompts customer due diligence.
- Suspicion of criminal activities: When the source or the recipient of the funds is fishy, CDD is vital. Suspicion may arise due to the funds coming from high-risk countries. Additionally, when the purpose of the transaction is vague, CDD helps to get clarity.
- To follow regulations: Units such as the anti-money laundering and counter-terror unit demand a thorough CDD process. This is to avoid enabling criminals to engage in money laundering and terrorist activities.
How to Conduct CDD
The first step involves confirming the potential customer's identity and business activities. Customer information such as names and identification is vital for safety purposes. This prevents getting into business relationships with identity thieves. Cross-checking legal identification documents with the information provided are also important. Failure to identify a customer correctly may lead fraudsters to take advantage.
Verifying a customer's identity reduces the chances of this happening.
The second step involves strict vetting of third parties. A customer may conspire with third parties to provide incorrect information. This may lead to great unprecedented losses. All parties involved in the CDD process must have a good business ethic. Experts recommend that businesses ought to assess and classify their level of riskiness. This makes it easy to identify potential risks before they bring losses to the business. A customer's risk profile determines whether to start a business relationship.
It is also crucial to identify whether enhanced due diligence is necessary. This occurs where the customer has a high-risk profile. But it may be an ongoing process as a customer may pose a higher risk to the business over time. Finally, securely store information obtained from the CDD process in digital form. This is important for future reference and also for regulatory requirements.
When Should You Conduct Enhanced Due Diligence?
Some customers may pose a greater money laundering threat. CDD measures for such customers should be tighter and extra information should be obtained. Enhanced Due Diligence (EDD) involves collecting this additional information from the customer. Some examples of EDD include requiring customers to identify the source of funds and establishing the purpose of the transaction.
Below are some of the instances that call for enhanced due diligence.
When the Customer Is a Politically Exposed Person
Due to many cases of corruption and embezzlement of public funds, PEPs pose a higher money laundering risk. Some may be collaborating with relatives who occupy top positions in the government.
Where There Is Affiliations With High-Risk Countries
These are countries where terrorism activities are rife. Such customers could be moving money to fund their activities within your country. Further documentation is important to prevent unintentionally propagating terrorism.
In Cases of Huge Transaction Amounts
Businesses flag such transactions for further looking into. They then carry out EDD to determine the purpose of the transaction for assessment.
When Dealing With Ultimate Beneficial Owners of a Transaction
Ultimate beneficial owners
own a legal entity or a person during a transaction. Examples include guardians for minors and attorneys for their clients. They transact on behalf of another party, hence, EDD should determine the validity of a transaction.
When You Suspect a Pattern of Activity
This arises due to a change in the customer's activity. Certain transaction types or the frequency at which they happen may cause suspicion. EDD is vital on these occasions, especially, where there are fraudulent activities taking place.
Where there Exist Business Partnerships
Before granting partnership certificates, it is important to carry out EDD. This is to make sure that the purpose of the business is not a cover-up for activities of fraud. Besides, it is a recommendation that partners conduct CDD on each other. This is to ensure that your partners are not involved in money laundering activities.
Ongoing Monitoring
CDD calls for the continued monitoring of business relationships. This helps to identify patterns that may increase a business's risk profile. It involves:
- Monitoring transactions and whether they are legitimate
- Observing business activities to ensure they match what they stated during CDD
- Reviewing the information provided during the CDD process regularly for inconsistencies
- Keeping relevant data and documents for future reference
The Role of Technology in CDD
Every day, risks of losses due to fraudulent activities evolve. Technology advancements have made it easy to impersonate other people. Money launderers also seem to be getting more creative with their methods. These developments have called for businesses to be more flexible and to have a more sound
customer due diligence process.
Technology has played a great role in ensuring that businesses have an efficient CDD process. With trends such as cloud storage, securely storing data collected from CDD has become easier. Yet, even with technology making the CDD process more efficient, human vigilance is vital. This will help to identify new risks as well as prevent the existing risks from happening. It is also important that businesses follow AML and CTU guidelines to the letter. Learn more about customer due diligence at
lightico.com.
