What is Due Diligence & AML
Due diligence is the process companies follow to verify identities, assess risk, and ensure regulatory compliance. In the financial world, customer due diligence (CDD) and enhanced due diligence (EDD) are essential parts of anti-money laundering (AML) programs. The “know your customer” (KYC) and “know your client” (KYC/“KYC-client”) procedures define how a company checks who its clients are, what they do, and whether they pose risks. A due diligence report captures these findings.
Why Client Due Diligence Matters
Poor or inadequate due diligence can expose a business to financial crime, reputational damage, and legal penalties. Regulatory compliance demands that institutions perform risk assessment, manage exposure to illicit activity, and document everything via due diligence report and compliance report.
Types of Due Diligence & When They Apply
| Level | When Applied | What It Involves |
|---|---|---|
| Standard Due Diligence (SDD) | Low-risk clients, straightforward identity, minimal risk in business sector | Basic verification: customer identification, checking official documents, understanding “know your customer” process |
| Customer Due Diligence (CDD) | Medium-risk situations: cross-border business partners, more complex ownership structures | Full risk assessment, verifying beneficial owners, reviewing transaction history, validating source of funds |
| Enhanced Due Diligence (EDD) | High-risk clients: PEPs (politically exposed persons), high-risk jurisdictions, large or unusual transactions | Deep dive into ownership, enhanced client due diligence, ongoing monitoring, extra controls and scrutiny |
Core Components of Due Diligence
- Customer Identification & Verification: Collect documents to confirm identity, address, corporate structure.
- Risk Assessment & Risk Management: Evaluate risk in the business, industry, geography, transaction type. A strong risk assessment framework is key.
- Know Your Customer / Know Your Client Procedures: Documented processes to establish who your client or customer is, their risk profile, and whether more enhanced due diligence is required.
- Due Diligence Report and Compliance Report: Maintain formal records of findings. The due diligence report should include identity, ownership, risk level; compliance reports show adherence to AML/KYC procedures.
- Regulatory Compliance: Follow relevant rules from bodies like FATF, or local financial regulators; ensure AML KYC policies are up to date.
- Ongoing Monitoring & Risk Audits: Detect changes in behavior or circumstances that could increase risk. Use periodic reviews, monitoring of large transactions, and internal or external risk audits.
Due Diligence Requirements for Different Customer Types
- Individuals: Verify identity, address, check for PEPs, monitor transaction patterns.
- Corporations & Entities: Identify beneficial owners, understand legal structure, cross-check registration documents, check financial statements.
- High-Risk Clients or Jurisdictions: Use enhanced due diligence; extra scrutiny on source of wealth, cross-border operations, sanctions lists etc.
Challenges & How to Overcome Them
- Data gaps or inconsistencies: customer records may be incomplete or outdated. Solution: implement strong data management, ensure periodic reviews.
- Hidden ownership: complex corporate structures or shell companies can obscure beneficial owners. Solution: insist on full disclosures, use external registries, use enhanced due diligence.
- Manual processes: slow or error-prone. Solution: automate KYC/AML workflows, use digital tools.
- Regulatory complexity: multiple jurisdictions with varying AML laws. Solution: maintain awareness of global regulatory compliance obligations; consult legal experts.
DeelTrix AML & Due Diligence Checklist
To help you ensure you meet all requirements, here’s a checklist:
- Identify customer or entity (customer identification)
- Understand customer’s business model and purpose
- Determine beneficial owners
- Assign risk level via risk assessment
- Decide on standard due diligence vs customer due diligence vs enhanced due diligence
- Review AML/KYC policies, client due diligence procedures
- Collect all relevant documents (identity, corporate structure, transaction history)
- Monitor unusual or large transactions
- Keep a comprehensive due diligence report
- Ensure ongoing monitoring and conduct risk audits
Key Takeaways
- Due diligence, including customer due diligence and enhanced due diligence, is central to preventing financial crime and ensuring regulatory compliance.
- The know your customer/know your client process must be robust, documented, and risk-based.
- Monitoring, audits, and reporting (due diligence report, compliance report) ensure sustained risk management.
- A clear “what is AML/what is due diligence” framework helps all stakeholders understand expectations.
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