Customer due diligence is a type of KYC process that involves the collection of documents for verification of the client’s background information to analyze the risk associated with it. It prevents the risk of financial crimes or any crimes such as money laundering, fraud, terror financing, etc. In this article, know more about customer due diligence and key elements of customer due diligence.

The financial institution has to collect the personal details of the client such as name, residence address, contact number, email address, etc to process the verification. Customer due diligence is done by institutions like banks, stock brokers, trading platforms, payment gateway or crypto exchanges, etc. Reserve Bank of India has made it mandatory to follow these norms and if not followed, the institutions are charged high fines.

When should you opt for CDD?

You can opt for CDD when the client or company needs simplifying due diligence. On the other hand, you can opt for EDD when the client or company has a high-risk profile.

You can opt for customer due diligence in case you are starting a new business relationship to ensure that the entity has a genuine identity and a low-risk profile, or found out that the provided documents cannot be relied upon, or suspect that there are any illegal activities or if there are any inconsistent transactions.

The procedure for customer due diligence

Customer verification

The first thing to process the customer’s due diligence is collecting all the required information and then verifying them. To conduct the verification, you will need basic documents such as the full name of the person, identity proof, date of birth, and residential address. This is the most crucial step of the verification process as it will detect all the faults or fraud in the documents early. You can also ask for additional identity documents that are issued by the government such as PAN card details, gas bills, electricity bills, water bills, and bank account details.

Customer due diligence can be conducted for an individual and a business. However, the CDD of a business involves higher expenses than the CDD of an individual. For the CDD of an individual, all you need is to collect identity proof, and address proof. While for a CDD of a company, you will need the legal name of the business, corporate registration number, registered office, and head office address, contact details of the company, registered trading name, and primary place of business operation.

However, the required documents to conduct a CDD of a company vary from institution to institution. You need to provide original documents along with their photocopy to complete the verification process.

Customer due diligence will help you to decide whether you want to enter into business dealings with the individual/corporation or not.

Opt for a type of due diligence based on your needs

You should opt for due diligence based on your requirements. For basic verification, you can opt for customer due diligence, and for advance verification, you can opt for enhanced due diligence.

Continuous monitoring

You have to conduct due diligence from time to time, depending on the requirements. Tracking transactions and any specific change in the profile are crucial aspects of due diligence.

To conclude, financial institutions such as banks, trading platforms, and other fintech companies use customer due diligence as well as enhanced due diligence is important for reducing fraud and protecting the company. Conducting CDD will ensure that there is no financial fraud and you are good to have a business relationship with the individual or the company.