Last month we looked at third party due diligence and how technology can improve capabilities for due diligence of your business partners. Today, we are going to change the focus somewhat and reflect on how you can improve the performance of your customer due diligence.

Customer due diligence or CDD differs from the due diligence a company might perform on overseas agents or joint venture partners. But it’s still an essential part of successful compliance programme and something that businesses need to get right.

So, let’s take a better look.

What is Customer Due Diligence?

Customer due diligence specifically applies to enquiries made about the customers of a business. Questions and information gathered help support a decision as to whether business should be conducted with these customers.

Customers pose different compliance risks to businesses compared to third parties. Money laundering, terrorist financing, tax avoidance, sanction violations are some risks associated with customer relationships that need be identified and mitigated against. Many businesses, but particularly those in the financial services, need to pay attention to this kind of due diligence. They must ensure that they know who their customers are and prevent criminals from gaining access to the financial system.

What are the Benefits of CDD?

Customer due diligence matters because you don’t want to be associated with another person’s misconduct. The benefits of a strong CDD process include staying on the right side of the law and of regulators, as well as avoiding significant fines and reputational damage.

With the importance of carrying out effective CDD in mind, let’s have a look at five steps that you can take to help improve your CDD.

How Can You Improve It?

  1. Verifying & Screening

Before entering a business relationship, you must be sure to ascertain the identity and location of your potential customer. This must all be verified, which is becoming increasingly difficult in a world more vulnerable to cyber crime. Additional identity checks and business verification are likely to be required to identify issues early on.

Name screening is another step to effective customer due diligence (CDD). The aim of name screening is to check if the potential customer is associated with any risky activities or included in blacklists. Names must be screened for:

ID verification and screening powered by technology offer a greater efficiency for financial services especially for the digital onboarding processes. Automation reduces the need for manual intervention and operational workload. It can provide peace of mind in an increasingly complex digital age.

  1. Activity Monitoring

 Customer due diligence is not only about getting to know the customer, but also checking and monitoring their activity regularly for AML (Anti-Money Laundering) and CTF (Counter Terrorist Financing) purposes. This monitoring must be ongoing and take customer’s account activity and KYC (Know Your Customer) compliance updates into consideration. Always ask yourself about the plausibility of the information gathered. Remember this is not a ‘tick box’ exercise- each customer should be assessed on their merits and all appropriate enquiries should be made and verified.

Once again, technology can be employed here to improve the efficiency of collecting and analysing huge amounts of data during the monitoring process.

 

  1. Don’t Ignore Red Flags

 It’s not just attributes of the customer relationship or their account activity which could raise suspicion, the customer’s behaviour during account opening and CDD information gathering could also reveal red flags.

Here are some of the more commonly identified red flags:

  • Reluctance to provide information, including vague or incomplete answers.
  • Applying pressure to open the account quickly.
  • Threats and aggressive behaviour during account opening.
  • Atypical knowledge of the firm’s CDD procedures.
  • Convoluted or unclear description of business activities or of the purpose of the relationship.
  • Documentation provided is unclear or unprofessional.

 

  1. Document Everything

 It is vital that you document everything that takes place. Documentation needs to be:

  • In a digital format
  • In one place
  • Easy to access

Your analysis could be reviewed by an independent third party, and they will want to see a clear digital audit trail of your process and subsequent actions.

Keeping records of all the customer due diligence performed is not just necessary for future regulatory obligations. It also means you can interrogate the records and re-run and re-analyse situations to decrease risk, improve performance and better guard against problematic accounts. It is good compliance practice.

You need to demonstrate that you not only thoroughly understand the customer and what documentation has been reviewed, but also the risks posed by the relationship. You will need to clearly articulate that you are comfortable with those risks and the reasons why, or how they could be mitigated if you are not.

 

  1. Use Technology

Today manual processes are no longer sufficient, they cannot cope volumes of customers and the amount and complexity of data required. It is advisable to employ a technology-driven customer due diligence programme. A solution that keeps those risks in check and your clients happy with an onboarding process that’s as minimally invasive as possible.

By investing in a technological solution, you can empower your employees and guide them through the appropriate due diligence questions to ask, as well as collect all the necessary documentation digitally. Good software should allow you to pull other due diligence data from external sources; and then combine all that data into a complete customer risk profile. Data analytics should also allow for better reporting; auditing; and training for your employees.

 

Think About Improvements and Technology

Typically, improvement in your due diligence will require some form of automation whether that be outsourcing background checks or implementing technological software.

At 1RS we want to help you know your customers better. Our software solution will provide a robust due-diligence system, consisting of ID verification methods; screening and onboarding procedures; risk assessments; red flags; ongoing monitoring, and preventive actions.

Our technology enhances efficiency by ensuring that pertinent information has been collected and stored securely and by consolidating all data in one platform, this solution enables improved decision making. Get in touch to book a demo or to speak to one of our experts today.

 

 

 

 

 

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