Due Diligence checklist

What Due Diligence Means for Your Business

Due diligence is a process that helps banks and individuals to get to know in detail who they are dealing with. Sometimes it is mandatory and other-other times voluntary. This article looks at the concept of due diligence implications for your business and includes a due diligence checklist to help you with compliance 

What exactly is Due Diligence?

When a business is about to sign an agreement or buy a product, it investigates the party to the deal and the product. It is a ‘measure of prudence’ or an attempt to ‘perform a prudent review’. A more common form of referring to the same is customer due diligence (CDD).

Types of Due Diligence

There are different forms of performing due diligence, each has its own merit. The process depends on the risk level and purpose. Here is a short list of the types of due diligence;

  • When Buying a company – To check if a company is legally and financially secure before buying
  • M&A due diligenceMergers and acquisition (M&A) due diligence is performed when businesses are merging or one business is planning to acquire another
  • Financial due diligenceIt is to investigate the financial health of an asset before purchasing
  • Customer due diligence (CDD)Businesses perform CDD to ensure that the customer is not involved in illegal activities or funding terrorism 
  • Commercial due diligencePrivate equity firms readily perform this diligence to test the commercial viability of a business
  • Vendor due diligenceWhen a business is about to be sold it requests a third party to perform an audit for the financial health of the business 
  • Third Party due diligenceA firm looking to outsource its services undertakes 3rd party due diligence to evaluate the risks

 

Does Law require you to perform Due Diligence?

Due diligence is a subset of ‘know your customer’ (KYC), which is mandatory for all registered banks and financial institutions. The digitization of banking services is expanding the list of businesses obligated by law to follow the due process. For example, the emerging industries of Fintech, Wealthtech, and Insurtech are a few names.

The law is stricter with financial institutions and asset management companies when it comes to performing due diligence. If you own a fund such as a mutual fund or a hedge fund you will have to perform the due process irrespective of the amount of investment an investor brings in. 

Similarly, the trend of ICO’s and cryptocurrencies has attracted the attention of the regulators in recent years, making due diligence mandatory in all developed economies of the world. It makes perfect sense, no one should be allowed to launder money through ICOs and tokens. 

How do You carry out CDD?

Here is a checklist to help your business achieve CDD;

  • Perform due diligence before you enter into any business with your customer. It is quite difficult to deal with risks afterward
  • Verify your customer’s identity
  • Verify the address of your customer
  • Screen third parties (your business partners, banks, lawyers, etc. also carry risk)
  • Collect all the necessary information, store it professionally (for example, high-risk clients should not mix with low-risk profiles)
  • Be vigilant in identifying profiles that might need enhanced due diligence (EDD)
  • Organize and manage the records as neatly as possible, make a digital copy

What if You do not perform Due Diligence?

There are two ways in which you could come short; not performing due diligence and inadequate due diligence. Both carry serious risks. 

For example, if an investigation reveals that your business did not perform due diligence, and allowed a person to open an account with your bank, who is listed on the Anti-money laundering (AML) blacklist, you might have to pay a hefty fine.

In addition, your business repute might get tarnished, causing irrecoverable damage. Other investors and customers might avoid doing business with you. You might also face hurdles in expanding your operations into other countries.

Conclusion

Due diligence might be required by law for your business. Even if it is not, it is wise to investigate who you are dealing with. Businesses not only perform due diligence before onboarding customers but also before entering into a contract with other businesses. 

However, the demands of regulatory bodies are tightening. Compliance is already a top priority for businesses associated with the financial industry. Many firms find it more feasible to get professional help regarding compliance. It frees up their resources for the core business.

Customer Due Diligence Checklist

Customer Due Diligence Checklist – Is Your Business Compliant?

Compliance regulations can be a challenging task for the financial services sector and fulfilling them can be a long and tedious process. But no matter how onerous the process may be, the costs of non-compliance can be detrimental. Thus the financial services sector must exercise a comprehensive CDD or Customer Due Diligence Checklist. Under the global compliance regulations, every company providing financial services is obliged to perform identity business verification of its clients during the onboarding process.

The customer due diligence process can vary depending on the nature of the account and the client. To simplify the procedure, therefore, companies should adopt a risk-based approach. This allows them to verify their customers based on the levels of risk they pose to the company. For example, a person opening a simple low deposit account may need some basic document verification at the time of onboarding. On the other hand, a beneficial owner of an offshore entity or a person having a high-risk business needs to be subjected to an enhanced due diligence process.

Customer Due Diligence Checklist – Steps towards a Better Compliance Structure

The real question then is that what steps should be taken to establish an efficient due diligence checklist. A simple customer due diligence checklist that banks and financial services can go through to make sure their CDD procedures screen through every sort of risk can include;

 

  • Build a Basic Screening Process to Weed Out any Obvious Levels of Risk

 

Building a basic verification procedure can ensure that there is no obvious fraud involved. This process may involve asking for a person’s ID information including full name, date of birth, address, along with some essential identity documents like an ID card, passport or a driver’s licence. It is also advisable to perform an address verification check by asking for the client’s recent utility bills. These Know Your Customer or KYC checks can help the company weed out any kind of identity fraud and determine if the person is trying to impersonate someone.

Additionally, at this point, it is also advisable to check for any beneficial owners (BO). In case there are any, make sure to get their details as well and the relationship between the BO and the customer. Moreover, perform an AML check to make sure that the customer is not exposed politically.

 

  • Vet Your Third Parties to Enhance the Process

 

Performing the entire CDD process on your own is impossible. To verify a customer you have to rely on third-party databases, banks, lawyers and auditors. It is important to choose outsourced service providers after proper research and due diligence.

 

  • Assess the need for Enhanced Due Diligence

 

For high-risk clients, the process of enhanced due diligence is very important. EDD involves collecting more information using customer risk assessments. Due diligence EDD can be an ongoing process and can be implemented for the entire period of time the client stays with your firm. It is performed by setting up some warning signals in your system to become aware of any threats or risks to your system immediately. Some alert signs that can help you through may include; the type of risk associated with the client’s transactions; their occupation; their address; and the type and value of their transactions.

All these red flags can enable you to assess whether your client is getting involved in money laundering or any other financial crimes. They will help you to timely assess any risks to your firm and take the appropriate action accordingly.

 

  • Make Sure you Comply with Data Protection Regulations

 

Performing customer due diligence is only a part of your responsibility. You must also make sure that every shred of data you collect from your clients is protected and secured. Moreover, GDPR also demands that any entity collecting customer data is also liable to protect it as well.

 

  • Keep Your Data Saved Digitally

 

Make sure all customer data you have is saved digitally and can be produced for proof if or when needed. Securing all CDD and EDD data is not only smart but a necessary regulation from any global regulator. Since any government can ask for client data in case of suspicion of money laundering or corruption, every firm is liable to be able to provide documented proof of their clients’ transactions.

A Customer Due Diligence Checklist can allow banks to implement a comprehensive compliance process. Due diligence CDD is a part of your AML compliance checklist. Shufti Pro is a leading data verification service that provides customer identification as well as business verification service. It provides KYC/AML for security compliance for companies looking to verify their clients through identity checks and AML screening.