What is a Due Diligence Checklist?

Businesses must ensure that they take appropriate steps to check the identities of any new customers they build relationships with. In high-risk situations, enhanced due diligence may be necessary. DeltaNet International explains what a due diligence checklist is and when a business should apply enhanced due diligence.

What is a Due Diligence Checklist?

Compliance Knowledge Base | FCA Compliance Training

Posted by: Rosie Anderson Published: Thu, 21 Nov 2019 Last Reviewed: Thu, 21 Nov 2019
What is a Due Diligence Checklist?

Customer due diligence essentially means that businesses must take steps to identify their customers and check that they are who they say they are. This includes confirming their identity by obtaining their name, photograph, residential address and date of birth from an official document. These measures must be taken whenever you establish a business relationship with a new customer. You should also consider applying customer due diligence with existing customers if you suspect money laundering or terrorist financing.

Due diligence checklists

If you're taking on a new customer through a sale or a merger, you should probably conduct a due diligence checklist. By following this checklist, you can analyse the company and learn about their assets, liabilities and contracts, as well as identify any potential problems. Due diligence checklists have many other uses, including preparing an audited financial statement or annual report, or as part of a general risk assessment. There is a template you can follow for a due diligence checklist. However, you can also change the basic format to be more specific to your industry.

Most due diligence checklists have 19 categories, including:

  1. Antitrust and regulatory issues
  2. Information technology concerns
  3. Publicity
  4. Outsourced professionals
  5. Insurance coverage
  6. Litigation
  7. Product and services
  8. Customer information
  9. Tax information
  10. Materials contracts
  11. Licences and permits
  12. Environmental issues
  13. Real estate
  14. Physical assets
  15. Intellectual property, including trade secrets, copyrights, patents and trademarks
  16. Employees and benefits
  17. Organisation and good standing of the company
  18. Financial information
  19. Revenue streams
What is a Due Diligence Checklist?

Enhanced due diligence

In higher-risk situations, businesses must conduct enhanced due diligence (EDD). A situation is considered high-risk if it presents a higher money-laundering risk, which might include involvement with customers linked to higher-risk countries or business sectors. EDD should also be applied when dealing with customers who have unnecessarily complex beneficial ownership structures. This kind of due diligence is often represented as taking additional measures to verify the customer's identity.

According to the regulations, businesses are also obliged to conduct EDD in situations involving politically exposed persons (PEPs). A PEP is defined as an induvial who has been trusted with a prominent public function, which generally means that they present a higher risk for corruption. When applying EDD to these situations, businesses are encouraged to consult the PEP list. This list includes customers with known links to high-risk countries and business sectors and customers with complex beneficial ownership structures.

If customers are trading internationally and your business processes these transactions, you must take the requirements of local financial sanctions regimes into consideration. EDD is necessary if you're involved in exporting restricted goods to high-risk countries. As part of the counter weapons proliferation regime, the government imposes controls over the trade of goods and services that can be used in nuclear, radiological, biological and chemical weapons programmes. EDD is required to identify if customers are exporting restricted goods to high-risk countries, individuals or entities.

Why is due diligence important?

The threat of terrorism in the UK is set to severe. This is reflected by the fact that the profile of terrorist financing risk has increased rapidly; therefore, businesses have an ethical obligation to take appropriate measures to manage these risks. If your firm fails to implement appropriate due diligence, you may end up facilitating money launderers or terrorist financiers. From a business point of view, this would cause irreparable reputational damage and financial penalties. More importantly, however, this kind of carelessness would endanger the entire country.

It's widely recognised that prevention is a more effective way to combat both terrorism and crimes such as money-laundering, which is why it's so crucial to actively engage with due diligence measures. By implementing a risk-conscious culture in the workplace, firms can ensure that all their employees are knowledgeable and well trained. By remaining vigilant towards high-risk situations, businesses can do their part to reduce and prevent the risks of both terrorism and money laundering.

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