So, what is customer due diligence meaning?
Customer due diligence is the process in which an organization collects a series of information on a prospective client or customer in order to assess any risk they may bring to the business. Conducting proper customer due diligence is essential to maintaining proper organizational oversight and is often a legal requirement. This article will cover the importance of thorough customer due diligence and how to accurately complete the process.
Customer due diligence is carried out to gain insight on potential customers or clients, enabling the organization to know just how much of a risk a customer presents with the most prominent risks being fraud and bad actors. This form of due diligence is actually a legal requirement in many countries before any business can be done between two entities.
Take for instance, organization "A" that wants to do business with a customer "B". Organization "A" deems it right to perform a due diligence on customer "B". Organization "A" is then obliged to obtain facts and pieces of information about customer "B" from reliable sources. In the course of this process, it is determined whether customer "B" is viable and follows set legal guidelines.
Simply put, customer due diligence is carried out by an organization in order to determine the risk level they are being exposed to when dealing with a customer. It can also be referred to as know your customer (KYC) or customer due diligence (CDD).
Knowing the customer whom an organization is dealing with is important for the following reasons:
The following steps help simplify an organization's CDD process:
The whole process can be initiated by giving the client a customer due diligence form or questionnaire to fill out.
As CDD is often a legal requirement, organizations must follow specific rules when performing the due diligence. According to Financial Crimes Enforcement Network (FinCEN), there are five customer due diligence rules, and they are:
To be frank, CDD is needed in any financial institution or other establishments that are involved in long term business relationships with clients. This is especially true when the commodity to be traded or the services to be rendered are on a large scale financially and in volume.
Customer Due Diligence in banks and financial institutions commonly find themselves interacting and getting into business relationships with customers. It is necessary to KYC and perform rigorous CDD on all their clients. Financial institutions should go through a risk-based approach to customer due diligence in order to save time and resources later on. Also, they are advised to follow the processes discussed above to help make the whole due diligence process simple.
The risk based approach to CDD was imposed on organizations by the fourth anti money laundering directive of the EU. The directive involves the determination of the areas that are liable to pose the greatest risks and creation of a system to constantly monitor these areas. This approach enables an organization to know which customers deserve to be put through stricter CDD after determining their risk profile. This system should be able to do the following.
The risk-based approach to CDD enables organizations to best prioritize the use of resources in the CDD process while, at the same time, making the process easier for all the parties involved. It allows organizations to know what areas require extra attention. As mentioned earlier, clients that have political associations often require EDD. Clients that are also making financial transfers over a particular amount often require EDD. The risk-based approach must be handled by well trained personnel and professionals, and by those who know where to concentrate resources.
In summary, Customer due diligence is a process that should be done thoroughly. Rushing this process could culminate in certain lapses that could go on to hurt the organization in future. Also, the parties involved should be knowledgeable of the process and understand just how intense it has to be. Lastly, only qualified professionals should be involved in the process to prevent waste of time and resources.
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