Practical Techniques Small Businesses can Use to Conduct Customer Due Diligence

At its core, customer diligence is taking necessary steps to identify who your customers are, as well as who they say they are. Ideally, you need to get the following information from the customer:

  • Their name
  • Date of birth and residential address
  • Photograph on an official document that validates their identity 

The best way to achieve this is to ask them for documents that are government-issued like passports, bank statements, utility bills, and other official documents. 

In some situations, you may also need to know who the “beneficial owner” is. That’s because there will be times that a person will be acting on behalf of another in a particular transaction. Or maybe because you have to establish the ownership structure of a particular organization, trust, or partner.

As a rule of thumb, the beneficial owner is the person that’s behind the customer or the one that controls the customer. 

In relation to this, whenever you are doubtful of an individual’s identity, you should not continue with them unless you are 100 percent sure. 

Objectives of CDD

Customer Due Diligence is the process of getting vital information from an individual’s profile and then evaluate it for any terrorist financing risks or prospective money laundering.

After completing the CDD, the customer is given a risk rating. A risk rating has different categories, such as  “low risk” or “high risk.” These ratings help a company come up with a decision, and whether or not they need to carry out appropriate checks, controls, and treatment depending on the risk. 

This is also known as a risk-based approach, wherein a company prioritizes the resources based on specific areas that require attention. 

1. Perform CDD measures

Doing a CDD before you fully enter a business relationship helps you know if there are bad actors early on. 

Know the identity and location of a prospective customer, and have an extensive background about their business activities. You can do so by finding documents that specifically verify the name and address of a prospective customer. 

This step is necessary to help you decide whether or not a potential client fits the established risk profile before you do business with them. It will also help you prevent any potential thefts and forgeries. 

2. Structure your process for third party database

You will always be relying on third-parties, from auditors, lawyers, to banks.

There are times wherein the only way to get the information that you need is through a trustworthy third-party. That’s why you need to ensure that their business practices and standards are specifically tailored to your business.

Why? because you will be the one who will be liable and penalized for non-compliance. 

3. Build a Basic Screening Process

Creating a basic verification procedure ensures that there will be no obvious fraud that will be involved.

By creating these Know Your Customer checks, it is easier for you to weed out any kind of fraud, making it easier for you to know whether or not a particular customer is just impersonating someone.

Also, check for any beneficial owners (BO). If there are, ensure that you get all pertinent details, as well as the direct relationship between the BO and the customer.

4.Organize secure and compliant data storage

When you are authenticating and verifying a prospective customer, classify them according to their risk category, as well as what type of customer they are before storing their information digitally. 

Creating a comprehensive process for your CDD-related information mitigates you from any business risks. 

5. Conduct Enhanced Due Diligence when needed

Aside from basic CDD, you also need to check if carrying out an Enhanced Due Diligence (EDD) is also crucial.

Remember that this will be an ongoing process. Customers can easily transition to higher risk categories, in the long run. So performing regular due diligence assessments is also necessary. 

Here are some factors wherein EDD is necessary, if not limited to:

  • The person’s location
  • The individual’s occupation
  • Types of transactions carried out
  • Patterns of activity within these transactions, frequency, and dollar value
  • Expected mode of payment

Why are these important? Well, again, this secures that your business will not be involved in any malicious activities. It also sees to it that you are meeting different Anti-Money Laundering (AML) and other regulatory requirements. 

Keep all the data on hand

Keep all the historical records on hand. For instance, you can securely store all the CDD and EDD records in digital form. Doing so helps you keep a record on all CDD and EDD performed on every customer, or any potential client, in case you will need it for future regulatory obligations.

CDD is a vital element if you want to effectively manage risks. It also protects you and your business against potential financial crimes and other notorious activities. So make sure that you follow this checklist of best practices.

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