Customer Due Diligence: What Is It And How Is It Practiced?

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Introduction

If you have worked in Finance or are looking for a job in the Finance and Law sectors, you have probably come across the term ‘compliance’. Now while the word itself can represent an abstract concept of following commands, in the corporate world there is a specific meaning to it. Today we will be talking about what customer due diligence is, why it is a form of compliance practice, and how firms practice this.

What is Customer Due Diligence?

Firms collate information about a customer’s identity, specifically identifying information about them, they do so to assess the risk they pose of defaulting on their future payments or committing other offenses like fraud. When they do what I’ve just mentioned, that action is called customer due diligence, or CDD in short.

CDD is entirely crucial for companies to prove that when these cases do happen, they have done their part to ensure their customers cleared a certain bar of transparency and honesty. This is so that the department of financial crimes can then receive the go-ahead.

In fact, states within the Financial Action Task Force have to implement CDD procedures and require CDD documentation to be audited and filed.

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What is checked for CDD?

At the foundation level, firms are required to store and ask for their customer’s name, address, their business with the firm, their position within their company, and how they will then use their account with the firm. The firms then check against submitted documents such as a customer’s utility bill, bank statements, and passport.

The above works on these three principles of customer due diligence. CDD must use a reliable third party to conduct the verification on their customer and collect data and personal information. This is to ensure the integrity of the CDD process and helps owners focus fully on onboarding their customers and giving them a full range of access to the firm’s tools after they’ve cleared a cheque.

The second principle is about checking if you and your client can set up ultimate beneficial ownership. This means that everyone benefits from the firm-client partnership.

Lastly, CDD exists to clarify the business relationship between the client and their firm, establishing clearly what business relationship firms look to achieve with their customers.

When is CDD a must?

  • Embarking on a new business relationship: companies should perform their customer due diligence to protect themselves from being cheated upon.
  • Customer is suspected of laundering money: This entry is the most straightforward. Customers are checked much more after reports have been made about a customer’s unusual habits
  • Unreliable documents: When the level of identifying documents is simply not high enough to clear the bar, further CDD measures are required to verify a customer’s identity

Moreover, on top of the scenarios where we have mentioned, CDD is a whole ongoing requirement for firms to run safely and smoothly. Financial officers perform CDD from time to time in the lifespan of a business relationship. Their risk profiles, the product of CDD research, are then put up and matched with the customer’s transactions to check if anything fishy is going on.

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Keeping CDD Records

All such documents collected for CDD have to be kept for at least five years from the date of the first customer due diligence check. This is not just simply a requirement, but also a necessity since higher authorities can always request CDD information. Firms that can do so effectively run at a more efficient pace and are more compliant.

This information will, at the very least, contain the following:

  • Copies of all identification documents are provided. This would include things like passports, driving licenses, professional certificates, birth certificates, etc.
  • Relevant business documents. These would be things like receipts, invoices, bank e-statements, and signed contracts.

The benefits for firms to be more compliant with external financial crimes auditing agencies and ministries are many, and this leads many firms to want to stay on top.

Third-Party

According to authorities, firms and companies are allowed to outsource their customer due diligence processes. This is an attractive option as this:

  1. Automatically makes the CDD processes more credible, since companies are getting separate eyes on all the information
  2. Allows the verification process for new customers to be streamlined and independent of the firm’s operations. For example, if the company is going through a specific crunch-time, if they were also handling CDD, client onboarding will be slowed down due to the amount of other work the employees also have to process
  3. Third-party compliance agencies most probably have access to record-keeping facilities whether it’s temperature storage space for paper documents or secure storage servers for electronic documentation.
  4. CDD checking will be done with the third-party contractor, meaning the time and supervision needed to produce copies of relevant data on request will be offloaded from the company. This leaves the company more agile and flexible in its work plans.
  5. Third-party agencies who specialize in compliance are more likely to abide by subtle regulatory details in the keeping of documents and in handing them up that even business professionals may miss.

Take note that third-party agencies have to themselves be compliant, and the ultimate responsibility of the customer due diligence lies with the original company. This means the company will still have to check and manage its third-party compliance task force to make sure that nothing is overlooked.

General guidelines for performing CDD

Companies are to use a method of CDD that adjusts the level of specificity based on the risk a customer poses. This is so that companies will not have to sacrifice manpower and client experiences by subjecting every new customer to a rigorous examination. Just like setting a test, you have to have questions along the way that represent identifiers to determine whether a customer requires enhanced due diligence.

These customers are then classified as being high risk, and the CDD process intensified as such. What’s to be noted here is also that this risk-identifier should be updated regularly and data on a customer’s risk status has to be kept confidential. This is to prevent customers from initially presenting themselves as low-risk clients, and then abusing that to get away will malpractice.

Conclusion

That’s about it for customer due diligence. We hope you have gotten a clearer picture of customer due diligence, what it entails for firms, and why CDD is crucial.

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