Entering into new business relationships is risky because of the ultimate question that must be addressed, "Is this person or company really who they say they are? In business, we must take active steps to know our customers and the risks involved. Customer Due Diligence has become an indispensable part of taking these steps.
What does Customer Due Diligence mean?
Literally, Customer Due Diligence means appropriate care for the customer. This has become increasingly important in recent years (in addition to security) because practices such as money laundering, fraud, and terrorism are things we unfortunately still have to deal with a lot. So it is important to know your customers well in order to know what purpose they serve and not put you at risk when entering into a business relationship. Customer Due Diligence is a tool to know clients and not to establish relationships with individuals who could damage trust in the financial company.
Conducting Customer Due Diligence
When a company falls under the scope of a law or regulation (relating to the Prevention of Money Laundering and Terrorist Financing Act or equivalent European or U.S. legislation) or wishes to enter into a relationship with a customer or potential customer, a CDD policy must be implemented on a mandatory basis. This applies to both a one-time transaction and a long-term customer-supplier relationship. In effect, this is a risk identification and assessment in accordance with the guidelines in relevant legislation. CDD is the process of gathering relevant information about the customer and assessing it for possible risk to the organization or money laundering/terrorist financial activities. Customer Due Diligence is also known as "know your customer" or "know your customer. This involves a company knowing who their customer is, what risks the customer may pose, and what the business relationship is used for.
CDD consists of:
- Acceptance of clients
- Identification and verification of clients
- If applicable, identification and possible verification of ultimate stakeholder
- Determination of the purpose and intended nature of the business relationship
- Monitoring and reviewing clients, accounts and transactions
- Risk management
A sound CDD policy prevents you from losing your integrity and having to pay hefty fines. It helps you keep your institution better protected from unnecessary risks.
For whom is a CDD policy important?
All financial institutions dealing with their client's assets are required to implement a proper CDD policy. Not only banks but also insurers, accountants, financial advisors, and even lawyers are obliged to report to the tax authorities if they notice anything strange about a customer. In this way, financial institutions actually function as extensions of the tax authorities. This makes it increasingly difficult to evade taxes.
Why is CDD important?
Customer Due Diligence is important to business operations. When you establish new customer relationships, there is a lot to check. This can be done through CDD. Furthermore, CDD allows you to avoid the risk of hefty fines and reputational damage. This way, you maintain trust in your company.
How can you successfully implement CDD?
Establishing sound CDD processes is required by law, but implementing them is not always easy. You need to identify and screen customers for potential risks in advance. But doing manual checks yourself takes a lot of time, with the SCOPE CDD solution you can automate this process. SCOPE CDD solution helps you comply with legal obligations, make informed decisions, and avoid exposing your business to unnecessary risks. You can find all about our CDD solution here.