Best Due Diligence Methods

Blog / Best Due Diligence Methods

In companies, there is some follow-up due to diligence methods applied to prevent money laundering crimes. In addition, AML regulators mandate some due diligence measures. 

Due Diligence Meaning

Due diligence is an analysis, investigation, audit, or examination performed to confirm the facts of any issue under investigation. In the financial world, due diligence means that before entering a proposed transaction with another party, that person can be any partner or customer; it requires examining the financial records of the natural person and the legal person and similar elements. Due diligence became common practice in the US with the passage of the Securities Act of 1933. As a result, brokers and securities sellers became responsible for clearly disclosing important information about what they sell with this law.

Anti-money laundering laws and regulations, due diligence requirements are mentioned in almost all regulations. Regulators such as Financial Action Task Force (FATF), HM Revenue and Customs, and the European Union have required due diligence in AML regulations. With current due diligence measures, organizations check whether their customers or partners are the people they said in their first transaction. At the same time, with due diligence, organizations get detailed information about their customers, decide their risks, and take the necessary measures accordingly. There are three types of due diligence used within the scope of anti-money laundering: Customer Due Diligence, Enhanced Due Diligence, Vendor Due Diligence.

Customer Due Diligence 

Customer Due Diligence (CDD) is one of the control procedures that companies apply when making a risk assessment of their customers. Customer due diligence checks, which are among the basic requirements of the risk-based AML approach, as stated by regulators such as FATF, allow customers to identify potential risks. The most important risks that companies basically face are money laundering, terrorist financing, and other financial crimes. Organizations should implement CDD procedures under AML responsibility. Companies that do not follow CDD procedures may face AML penalties. Customer Due Diligence (CDD) is significant for complying with the relevant legislation in institutions, identifying customer risks, providing requested products or services, preventing money laundering and financing of terrorism, and identifying and analyzing unusual events organization's relationship with other companies.

It is essential to apply customer due diligence (CDD) in new business relationships. After checking the person with whom the business relationship will be established, the business relationship should be started. This eliminates potential risks. Other than that, CDD checks should be done in case of suspicious transactions. There is a certain process of making Customer Due Diligence; this process includes:

  • First, basic information about the customer is collected through Customer Due Diligence. This information includes the customer's full name, contact information, place of birth and date of birth, nationality, marital status, etc.)
  • In case of doubt, a scan is done to verify identity.
  • Customer activities are examined.
  • The ongoing Control process continues as customer profiles may change.
  • Enhanced Due Diligence is required for higher-risk customers.

Enhanced Due Diligence

Enhanced Due Diligence (EDD) is designed to handle high-risk and large transactions; EDD measures are taken in these transactions because CDD measures are insufficient. It is a fact that risky customers and transactions pose a greater risk to the financial sector. Enhanced Due Diligence is a KYC process that provides a higher risk of scrutiny and emphasis. EDD, which exceeds the CDD, tries to create a higher identity assurance by evaluating the customer's risk category by taking the customer ID and address. When money laundering through your service and product or customer is an increased opportunity from terrorist financing, a high-risk situation can arise, so EDD is required to reduce the increased risk. Some situations require EDD; as an example, we can give the following:

  • Politically Exposed Persons (PEPs) or close spouses or family members should undergo a more comprehensive review process.
  • Enhanced Due Diligence measures are required for any business in Europe in a country on the High-Risk Third Countries list.
  • Some relationships, such as shell banks, also require EDD.
  • Sectors at higher risk of money laundering, such as gambling, also often have EDD requirements.
  • EDD is important in countries that are blacklisted to fund or support terrorist activities.
  • EDD processes are important in countries that are recognized for common levels of corruption determined by trusted sources.
  • EDD measures may be required in private and correspondent banking.

Vendor Due Diligence

Vendor Due Diligence (VDD) is involved in business relationships between companies. If the shares of any company go on sale, potential buyers should investigate this sale thoroughly and create a report; at this point, it is the seller's due diligence that helps both the seller and the buyer. VDD reports, especially used by financial institutions, are used to evaluate potential sellers. VDD is deemed necessary to reduce threats to business operations and reduce compliance risk and reputational risk. Therefore, Vendor Due Diligence checklist is important for AML / CTF.

Vendor Due Diligence the report is conducted by a third party and presented to potential investors. Vendor Due Diligence has some important goals. For example, to learn about the problems of the companies in detail, to sell successfully at the best price, increase the purchase price, identify the critical business factors for the future performance of the companies, to see the potential risks in the buyer organizations, to ensure that the business plan is seen clearly and for the sellers. 

Sanction Scanner allows you to take CDD measures in compliance with regulations. With our AML Name Screening tool, you can scan your clients on Sanctions, PEP, and Adverse Media lists and learn your risks so you can comply with AML-CTF regulations. Mitigate risks immediately and protect yourself from financial crime.

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