What is Due Diligence?

Surface-level screening can lead financial organizations to offboard individuals they consider high-risk, even though the risk could be easily managed.

Due diligence is a process financial institutions use to conduct in-depth screening as part of the onboarding process.

This is a detailed process in which financial institutes adopt different sets of rules and regulations as per their jurisdictional law on how to onboard a customer and maintain a business relationship with them.

Suggested Article: AML Compliance Guide 2024

Why is Due Diligence Important?

The due diligence process helps financial institutions fight against money laundering and terrorist financing.

From customer onboarding to accessing their risk levels and evaluating them against different screening lists, from following different measures to keep an eye on suspicious transactions, due diligence helps the institute comply according to the jurisdiction specific AML/CFT law of the country.

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What are the Prominent Types of Due Diligence?

Following are some of the most common types of due diligence:

Simplified Due Diligence –  the rules used for customers with low risk of AML/CFT.

Standard Due Diligence is used mainly to onboard customers, and the rules are primarily applied to the vast majority of people.

Enhanced Due Diligence is applied to customers who are defined by law as being at high risk for money laundering (AML) and counter-terrorism financing (CFT), such as politically exposed persons (PEPs).

Ongoing Due Diligence is used to continue customer monitoring so that they are compliant with the AML/CFT rules and regulations.

Event-driven Due Diligence is used whenever a suspicious transaction is made or a red flag, according to the law, happens.

Suggested Read: Top 7 Red Flags of Money Laundering

Due Diligence Checklist

Here is a quick checklist guide for businesses looking forward to performing due diligence as a consistent part of their onboarding process:

• Screen customers to conduct an in-depth risk analysis for a safe customer onboarding process.
• Applying different types of due diligence services according to the requirements of jurisdiction-specific laws.
• Screening customers for different sanction lists, including OFAC, OFSI, SDN, SECO, and many more.
• Ongoing due diligence is required for high-risk customers to monitor red flags and suspicious transactions and file Suspicious Activity Reports as needed or defined in the law.
• Maintain all of the records related to the customers from onboarding even after the closure of the business, which is mostly for at least 5 years.

Suggested Read: 9 Essentials of AML Compliance Checklist In 2024

Why is Due Diligence Important in Compliance?

Due diligence is an essential process in the fight against AML/CFT. Risks may emerge later in the journey, but compliance responsibility begins today, thus, due diligence with all relevant laws and regulations is significant in managing risks associated with targeted jurisdiction.