Customer due diligence means that you actively take steps to identify your customers by checking that they are who they say they are. This is so organisations know who they are doing business with, reducing the chances of problems occurring in the future due to activities facilitated by them. A business relationship is one that can vary in formality, but due diligence and 'Know your Customer' (KYC) checks still need to be taken seriously.
Due diligence protocol is so important because of the various threats and risks that organisations face. If an organisation fails to perform a background check on its customers, it could become an accessory to money laundering – something that could taint their reputation and trustworthiness in the business community and at large.
Due diligence is an integral part of the buying process for both sellers and buyers because it requires checks on assets, liabilities, cash flow, and the general financial management of the business/individual in question, giving you peace of mind before you get involved with them.
Although it can be seen as a chore, due diligence is a vital step in the buying and selling process. It can prevent you from going into business with an individual or organisation that could cause harm in the future, therefore saving you potential stress and loss of money – in short, it is better to be safe than sorry!
The Process of Due Diligence Checks
To carry out due diligence, one should collect the name, photo ID, residential address and date of birth of the customer. The best way to collect this information is through a government issued documents, such as a passport, as well as utility bills and bank statements.
You will also need to identify the 'beneficial owner' of any legal entity customers. 'Beneficial owners' are defined in two ways: either as individuals or organisations that own 25% or more of the entity in question (owners), or a single individual who has significant responsibility for controlling, managing, or directing the entity (controllers). The latter may include persons such as CEOs, COOS, Vice Presidents and so on. The point in identifying these beneficial owners is to understand the nature and purpose of the customer relationship, thereby reducing risk by actively preventing anonymity.
If you have doubts about a customer's identity, you must stop dealing with them until you're sure.
To summarise, customer due diligence needs to be carried out when:
- You establish a new business relationship with a customer
- You suspect money laundering or terrorist financing
- You have doubts about the identity of the customer
- The circumstances of a customer change
When you get into a new business relationship, you need to obtain information on the purpose and intended nature of the relationship, an example of these details would be explaining where any funds will come from and the purpose of these transactions. Keeping up-to-date records will save a lot of time when it comes to due diligence checks. Good record keeping will mean you can minimise the potential risks ahead by carrying out regular fact checks and by keeping records up to date.
Linked transactions are when individuals break down large transactions into smaller amounts to avoid due diligence checks; it is important for organisations to have systems in place to detect these situations and respond accordingly. Customers that are trying to avoid due diligence checks are high risk and should be treated with suspicion.
When certain behaviours such as above materialise, an enhanced due diligence check should be carried out. This should also take place if:
- The customer is absent when you carry out the identification checks
- You are working with a politically exposed person (PEP), this usually refers to a member of parliament or a military official
- If the person in question is from a high risk third country identified by the EU (a country that has substantial money laundering and terrorist financing risks)
Steps You Can Take to Stay on Top of Due Diligence Checks
To keep your business safe, you need to make sure you have adequate internal controls and systems in place. This means that if criminals try and use your business for money laundering, the checks will raise suspicion and alert the relevant people.
Some tips to avoid money laundering risk:
- Appointing a 'nominated officer' means that employees have a point of contact when it comes to reporting suspicious activities.
- If your business is larger, appointing a compliance officer to carry out consistent due diligence checks will help minimise risk.
- Regular communication throughout the business around money laundering risks and vigilance to create a compliance culture.
- Anti-money laundering training can be another step towards a compliant culture due to a shared understanding throughout the whole workforce.
- Regular checks of anti-money laundering policies, controls, and procedures, so that your business is a well prepared for threats.
- A policy statement includes your anti-money laundering policies to prevent money laundering, and a framework for how you will deal with the threats out there.