Due diligence you can trust

Customer due diligence is a process used to assess the risk associated with potential customers. In the same way that you assess a potential business relationship, customer due diligence is the act of vetting and verifying a potential customer—whether an individual or organisation. The goal is to gain transparency into their identity and intent, and in the process, minimise the chance of working with criminals who intend to launder money or commit other financial crimes.

Customer due diligence, also known as CDD, is a legal requirement for financial institutions. These are the businesses that money launderers target, to transfer their cash into clean money. When performing due diligence checks, these businesses collect, evaluate and record relevant information about their potential customers, including their identity, financial history and background.

The information that can be used to verify customers comes from a mixture of resources, including:

• Customers providing the required information to use the financial service
• Sanctions lists from authorities and governments
• Company listings and other public data
• Third-party sources that are used to provide private data

Why are Customer Due Diligence Measures Important?

Financial criminals rely on processes that don't check a customer’s identity or intent: which allows them to subtly exploit businesses in a range of ways, enabling them to make their ‘dirty’ money appear ‘clean’.

This is why a risk based approach is important. It protects your business, the economy and society from money laundering risks. During CDD, financial institutions perform specific procedures like Know Your Customer (KYC) policies to determine the risk of working with potential customers. These processes help to highlight high-risk individuals or groups such as politically exposed people (PEP) and prosecuted money launderers.

Suspected or guilty individuals or groups involved in some form of financial crime are typically given sanctions. CDD involves searching sanctions lists to help firms if they’re restricted or prohibited from working with their potential customers.

What Does the Customer Due Diligence Process Involve?

Usually, financial organisations will analyse:

• Customers’ personal information: This will include the potential customer’s full name, approved photo identification, residential address, phone number, occupation, National Insurance Number, and email address to confirm that customers are who they say they are.
• Business information: This information includes their source of funds, what market they operate in, what activities they do, details of their business, their business model and ownership details.
• Customer risk profile: Potential customers can be sorted into groups with different levels of risk based on their identity, location and type of business. This will then determine how much due diligence is required for each customer, where those with a high risk of money laundering will need a more in-depth analysis.
• Ongoing monitoring: Once they begin working together, the financial business still needs to perform ongoing monitoring and due diligence, in case anything changes. This can involve flagging suspicious transactions and changes in customer profiles as they keep an eye on high-risk customers.

When is Customer Due Diligence Required?

Anti-money laundering (AML) activities don't always need to be applied, but they exist to combat risk in their most common places, including:

• New customer relationships: When a customer joins, banks and financial institutions must perform their CDD before the onboarding stage. The initial information collected can then guide the remainder of the CDD operation and risk assessment while ensuring the customer is who they say they are.
• Occasional transactions: In particular instances, occasional transactions can be a high-risk activity and call for CDD to take place. These include transactions that are much higher than usual or sent to foreign countries that are high risk from past money laundering cases.
• Customer suspicion: Customers can sometimes be flagged or be suspected of money laundering, which makes them high-risk customers and they need to have extra CDD performed on them.
• Inadequate documentation: Customers that provide unreliable identification or other documentation are a red flag. While these customers may not be laundering money and may have just supplied inadequate information, further CDD checks should be done here.