In this era, having a large customer base is vital for the growth of the business. Having a business relationship with the customers involves risk. 

Customer due diligence is conducted to know the high-risk customers. 

Any customer who poses a high risk requires an organisation to conduct enhanced due diligence.

Table of content

1. What do you mean by Customer Due Diligence

2. When customer due diligence is required

3. Process of customer due diligence 

4. What is the checklist of customer due diligence

5. Types of customer due diligence

6. When a bank applies for customer due diligence

What do you mean by Customer Due Diligence?

Customer due diligence is designed for and used by banks and financial institutions, as it helps to know about the onboard customer. 

VDD and CDD help in identifying the financial or criminal risk involved with the customers that we are dealing with.

At the initial level, banks or financial institutions are required to collect and verify all the information from the customer to know, if is there any financial risk attached to it.

Customer due diligence is the main element of knowing your customer.

When customer due diligence is required

Business relationships: Before entering into any business relationship, the company must perform customer due diligence. With the help of this process, companies identify the business model of its customer and source of funds.

Ongoing monitoring: After the business relationship is built, due diligence does not stop. It’s the ongoing process which monitors the system from time to time, keeping an eye on high-risk customers and suspicious transactions. 

Collecting customer information: Address, phone number, customer’s full name etc are matched with the documents provided by the customer, verifying whether it is true or not.

Process of customer due diligence

1. Verification of identity: Initial step of customer due diligence is to have basic information about the customer and verify it by knowing their financial sources and understanding their business activities.

2. Choose due diligence track: The risk profile of the customer must have been made while performing the previous step. The level of risk determines, whether the clients require enhanced due diligence or not, and do they fall in this category.

3. Monitoring & Screening: Once business relationships are built up, it requires continuous monitoring and screening. Initially, small transactions are not found suspicious but it lets you know about the pattern of transactions. Through this process, the pattern of the customer is revealed and accordingly, there's a change in the risk profile of the customer.  

What is the checklist of customer due diligence?

1. Verify customer identities: Before entering into any business relationship, the process of customer due diligence detects the risk and resolves it. There are some information which helps in identifying -

A. Name

B. Address 

C. Mobile number

D. Date of birth

E. Documents relating to the identity 

F. Company’s name

G. Company’s registration number

H. Memorandum

I. Date of incorporation etc.

2. Assess the third party database: The third parties- banks, lawyers, auditors or other professionals help you in performing the customer due diligence. You should choose a third party wisely as the responsibility depends upon you. Whereas, some databases required for customer due diligence are needed only through a reliable third party.

3. Secure database: Customer due diligence ensures the collected information is stored securely and verifies the customers.

4. Be ready for audit: Stores all the records performed on each customer in a digital form. Storing the records of a potential customer is essential for future obligations.

Types of customer due diligence

1. Simplified customer due diligence 

Simplified due diligence is applied for the low-risk customer and low risk of money laundering. The requirement is to identify only the customer, verification of customer identity is not required.

2. Enhanced customer due diligence

There are a number of cases which are found suspicious and present a high risk of money laundering. Therefore, enhanced due diligence should be performed to know about the customer’s source of funds and wealth.

3. Customer due diligence for banks

Customer due diligence is processed to identify any money laundering activity. This is basically designed for banks and financial institutions. Therefore, high-risk customers are verified and investigated thoroughly, as if they are involved in any money laundering activity as it checks the background of the customers rigorously.

When a bank applies for customer due diligence

We are in the phase where a large number of people apply for loans. When banks have to approve loans, they apply customer due diligence.

The process is conducted to determine whether the borrower has repayment ability and the creditworthiness of the customer. Thus, customer due diligence is conducted to assess the risk profile.