Customer due diligence is a term used to describe the processes and procedures used by a business to qualify a potential customer before the establishment of a working relationship, and is also used to continue qualifying that relationship once it is established.
The idea behind customer or client due diligence is to evaluate the circumstances of the client and make sure that doing business with that customer is within the level of risk that the company is willing to take on in exchange for the benefits of establishing and maintaining that relationship. At its best, this type of due diligence prevents companies from securing clients who ultimately are unable to honor their obligations and create some degree of financial distress for the business.
Simplified Customer Due Diligence
A designated person does not have to identify information on the purpose or intended nature of the business relationship of a customer, or the beneficial owner of a customer, where the customer is considered to present a low risk of money laundering or terrorist financing.
However, the designated person must obtain sufficient information about the customer to satisfy itself that the customer meets the criteria for SCDD to be applied to it.
Enhanced Customer Due Diligence
In situations that present a higher risk of money-laundering or terrorist financing, designated persons are obliged to undertake CDD measures above and beyond normal measures i.e. Enhanced Customer Due Diligence (ECDD).
The extent of additional information sought, and of any monitoring carried out in respect of any particular customer, will depend on the money laundering or terrorist financing risk that the customer is assessed to present to the designated person.
Customer due diligence comprises the facts about a customer that should enable an organization to assess the extent to which the customer exposes it to a range of risks. These risks include money laundering and terrorist financing. Organizations need to ‘know their customers’ for a number of reasons:
(1) to comply with the requirements of relevant legislation and regulation;
(2) to help the firm, at the time the due diligence is carried out, to be reasonably certain that the customers are who they say they are, and that it is appropriate;
(3) to provide them with the products or services requested;
(4) to guard against fraud, including impersonation and identity fraud;
(5) to help the organization to identify, during the course of a continuing relationship, what is unusual and to enable the unusual to be examined;
(6) if unusual events do not have a commercial or otherwise straightforward rationale they may involve money laundering, fraud, or handling criminal or terrorist property;
(7) to enable the organization to assist law enforcement, by providing available;
(8) information on customers being investigated following the making of a suspicion report to the FIU.
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