As a business owner, when you hire a new employee, you would want to make sure that they are the right candidate for the job, right? Just as employers assess a potential employee’s credentials, banks and other financial institutions need to assess the credibility of prospective clients before any transaction. This is where client due diligence plays an important role.
What is client due diligence?
Client due diligence (CDD) is a critical aspect of the KYC (Know Your Client) and Anti-Money Laundering (AML) initiatives introduced by the banks. The CDD helps banks verify the credibility and real identity of the clients as they claim in their account opening form. CDD also enables banks to check whether the potential clients are on any prohibited list.
In simple words, financial due diligence is the background check of a client to ensure that they don’t possess any threat to the bank before becoming a client.
Why is CCD critical for banks?
Over the years, as the number of money laundering cases has been rising, the banks suffer huge losses. To mitigate the situation, the financial institutions, especially banks, are investing a significant amount of money in AML compliance measures. These countermeasures are meticulously designed to avoid the growing risk of money laundering, a common tactic used by several criminal enterprises, including hackers and online fraudsters.
Levels of Client Due Diligence
There are two types of CDD that the banks can conduct – simplified due diligence and enhanced due diligence.
- Simplified due diligence
This is a basic level of due diligence that can be completed on clients who do not pose a high risk to the business. These clients have less probability of being involved in money laundering or other fraudulent activities.
- Enhanced due diligence
Enhanced due diligence (EDD) may be necessary when the banks consider the potential client to pose a high risk. Generally, the banks conduct enhanced due diligence on specific types of organisations who may have legal cases against them, have some kind of political influence, located in a high-risk location, etc.
Benefits of client due diligence for banks
- One of the key benefits of financial due diligence for banks is that it helps them avoid unnecessary risks and ensure that they don’t get into legal hassles. It also allows the banks to maintain a good client relationship
- Client Due Diligence helps the banks to know more about their clients, thereby establishing a more transparent and stronger working relationship
- When banks carry out in-depth client due diligence, it enables them to thwart any initial reservations, they may have about the client while doing business with them. Banks can assess the financial conditions of the potential client and do business with full confidence
- The regulators require the banks to showcase evidence about the various business activities they carry out with their clients through due diligence