A Guide to Customer Due Diligence
23 March 2017
Customer due diligence is the process a company undertakes to establish who its customers are by acquiring proof of their identity. Companies are required to carry out such checks when forming new business relationships, if it has suspicions about money laundering, or has reason to believe that a customer is being funded by a terrorist organisation.
In some instances, businesses may be required to undertake enhanced due diligence. This process is necessary if a company is intending to enter into a business relationship with a politically exposed customer (e.g. an overseas member of parliament who is considered to be in the public eye), if the customer is not present when identification checks are taking place, or if a heightened risk of money laundering has been identified.
Conducting customer due diligence is a legal requirement of the Money Laundering Regulations 2007.
Customer due diligence process
Before a company begins the customer due diligence process, it must determine what level of customer due diligence is required based on the transaction size, the type of client, and the business relationship it has with the customer.
A business may carry out its own customer due diligence process or ask a third party to conduct it on their behalf. However, the company must be aware that if a third party does undertake customer due diligence checks for them, they are still liable if it fails to comply with the standards set by regulators.
The business must be able to sufficiently demonstrate to their supervisory authority that they have taken appropriate steps to examine the risks of money laundering and terrorist funding.
Typically the customer due diligence process is as follows:
The business must acquire three types of information from the customer: full name, a photograph of the customer and either their date of birth or residential address. This information must be sourced from official documentation, such as a passport or bank statement.
At this stage, it is important for the business to identify whether there is a beneficial owner involved with the customer. A beneficial owner is an individual who has significant control over the customer, either through ownership, or if the customer is carrying out a transaction on their behalf.
If the business determines that a beneficial owner is involved, steps must then be taken to verify their identify and establish the relationship between the customer and beneficial owner. The company must acquire proof of the beneficial owner’s identity by obtaining the relevant documentation.
The company must then begin monitoring the relationship between the customer and the beneficial owner and the full customer due diligence process must be repeated every few years.
Once the company has obtained and reviewed all documentation and is satisfied that they have the correct information regarding their customer’s identity, they are free to continue doing business with them. If however the business has doubts or reservations about the customer’s identity, they must suspend all dealings with them until they are completely satisfied that they know who they are.
Benefits of customer due diligence
One of the key benefits of conducting customer due diligence is that it protects the business from encountering unnecessary risks and ensures that the company does not get into financial or legal difficulties. It also protects the customer relationships developed by a business.
Customer due diligence helps business to get to know their customer better, making for a stronger and more transparent working relationship.
Furthermore, carrying out in-depth due diligence means that businesses can dispel any initial reservations and enter into new business relationships with full confidence.
A business faces penalties and fines if it fails to provide regulators with sufficient evidence showing that they have conducted thorough customer due diligence, so it is in a company’s interest to carry out the process conscientiously.
Customer due diligence checklist
- Full name of customer
- Photograph of the customer on an official document such as a passport
- Residential address of the customer or customer’s DOB
- Other sources of personal information e.g. utility bills, bank statements and electoral register
- Declaration of whether there is a beneficial owner involved
- Identity checks of the beneficial owner, including full name, a photograph of them from official documentation, residential address, DOB and the relationship between the beneficial owner and customer
- Declaration of the business’s intended relationship with the customer including the purpose of the planned transactions and the source of funds.
- Details of the customer’s employment or company
- Analysis of the risks involved in developing a business relationship with the customer
- Declaration of whether the customer is considered to be ‘politically exposed’ and the further information and measures required to comply with enhanced due diligence Documentation detailing the implementation of the company’s anti-money laundering policies and procedures
- Policy statement. This should clearly state the company’s strategy for preventing money-laundering and verifying customers’ identities, include information on staff and their responsibilities, as well as a commitment to providing training on due diligence processes. A summary of how the business will continue to monitor the customer should also be included.
- A commitment to keep a record of all customer due diligence checks and of the business’s relationship with the customer including customer correspondence, cheques and receipts for five years
How DueDil can help
From due diligence to deal prospecting, DueDil helps businesses make data-informed decisions.
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DueDil takes live data from a wide range of authoritative sources, combines it and presents it clearly. On top of this foundation is an intuitive set of features that allow users to search for, segment, benchmark, monitor and export company information.
To find out how your business can enhance its due diligence processes, get started with DueDil today.