Customer Due Diligence is a mandatory procedure in a jurisdiction, banking, or trading system. The purpose of this procedure is to verify customer data for its authenticity and includes the collection and verification of personal information about the customer before entering into a business contract. If this procedure is neglected, companies run the risk of running into fraudsters, security threats, and government fines for non-compliance with AML requirements. In this article, we’ll take a closer look at what is customer due diligence, what its types are, and how it occurs.
Types of customer due diligence (CDD)
Depending on the level of risk that a company will incur in case of violations, the type of customer due diligence is also determined. So, for example, low-risk companies are allowed to conduct a simpler version of the CDD, and accordingly, high-risk organizations must perform the full procedure.
- Simplified due diligence
This type of check is usually found in public enterprises, or individuals who use reliable sources of funds. Despite the name of this type of check, it doesn’t miss any of the items in the regular version of the CDS, but it takes much less time to complete. For example, when it comes to making a transaction, users can do the simplified check if they transfer no more than $100, but if the limit is exceeded, they must go through the full SDD.
- Advanced Due Diligence
Extended Due Diligence occurs in high-risk cases, and applies when clients are/are:
- From high-risk countries
- Persons of high risk
- Political VIPs
- Have cross-border correspondent relationships with a third country
- Have large transaction amounts
It is also common practice during the EDD to provide additional data, which may also vary depending on the situation. Clients may be asked for additional personal information as well as background checks on the sources of funds and wait for the approval of the top management of the organization for the transaction.
What is required for customer due diligence – how does it happen?
To simplify the understanding of the CDD process, it can be divided into three stages:
- Stage 1 – customer due diligence
First, the company asks for basic information about the client. The list of requirements differs depending on whether the client is a single physical person or an entire organization. For identity verification, the client is required to have their full name, residential address, and taxpayer number (identification number). To do this, the company can check your identification document (passport). To verify the address, companies refer to utility bills that were generated no later than six months ago or municipal taxes.
To verify a company as a client, it must provide details such as contacts, the full address of the head office, the place of business, the registration number and the official name of the company, as well as the trade name.
All this is needed to establish the identity of the beneficial owners and verify them as well.
- Step 2 – Choosing the right direction of due diligence
We have already figured out that there are types of due diligence such as simplified, enhanced, and conventional. You need to decide on the type of CDD depending on the circumstances and act according to its algorithm.
- Step 3 – continuous monitoring
Once the CDD has been completed and the contract has been signed, you should continue to monitor the new customer, because the customer’s profile may change over time. That is, customers may take actions that were not intended by the type of verification they underwent. Monitoring customer profiles can help companies protect themselves from possible threats and risks.