Customer due diligence is the processes used by financial institutions to collect and evaluate relevant information about a customer or potential customer.
It aims to uncover any potential risk to the financial institution of doing business with a specific organisation or individual by analysing information from a variety of sources. These include:
- The customer themselves, who needs to provide certain information in order to do business with the financial institution
- Sanctions lists published by governments or territories
- Public data sources, such as company listings
- Private data sources from third parties
Customer due diligence is a major part of meeting Know You Customer (KYC) standards. These vary greatly from country to country, or market to market.
A wide range of due diligence information needs to be collected
Basic customer due diligence involves collecting information about:
- the identity of a customer – from their company address to the names of their individual executives
- the activities a customer is engaged in and markets in which they operate
- the other entities with which a customer does business
- the customer’s risk profile – how likely they are to be involved in activities that expose the financial institutions to risk
Why is customer due diligence important for the financial industry?
There are many reasons why financial institutions do customer due diligence and commit time and effort to ‘know their customers’:
- To ensure the organisation remains compliant with the regulations and laws of the regions or markets they are operating in
- To help make sure the customer is really who they say they are
- To guard against fraudulent activity such as identity fraud or impersonation
- So that the financial institution can assist law enforcement
A risk-based approach
Many international KYC standards require financial institutions to take a risk-based approach to customer due diligence. This means that those customers that potentially pose a higher risk will be subject to enhanced due diligence processes. Differing levels of due diligence will be applied depending on the nature of the customer’s relationship with the bank and their risk profile.
The main risks that customer due diligence aims to mitigate include:
Due diligence isn’t just for new customers
Customer due diligence is never complete. It continues even after a new customer is on-boarded with a financial institution. This is because a customer’s activities may change, which in turn can affect their risk profile.
Financial institutions also monitor and analyse their customers’ transactions as part of the ongoing due diligence process.
Reducing operational costs of customer due diligence
Customer due diligence is a costly exercise for banks, as they need to employ teams to on-board customers, investigate false positives and conduct manual checks. Swift’s portfolio of cloud-based solutions have been built to help reduce the administrative burden across the due diligence process.
Identify: Swift’s KYC registry provides a safe and secure platform for customers of the bank to provide KYC information and sets out common standards for information collection and management.
Screen: Swift’s screening services support the screening of entities against sanctions, PEPS and adverse media.
Monitor: Swift’s sanctions screening services enable banks to monitor cross border payments for sanctions risk.
As the global provider of payments and financial crime compliance solutions to the financial industry, we work with over 11,000 institutions worldwide to deliver innovative solutions in the customer due diligence space.