Tuesday, 26th August 2014
Mark Dunn describes the key elements of effective due diligence, including Simplified Due Diligence for "low risk" clients and Enhanced Due Diligence for "high risk" prospective clients or third-parties.
The past decade has seen due diligence transformed into an industrialised operation as the fight against corruption has intensified.
Governments from all regions are introducing stricter laws to combat bribery in business and companies must strive to balance the demands of regulatory compliance and the need to execute strategic objectives.
Ongoing legislative change, backed by robust supervision, is synonymous with the due diligence measures required to tackle money laundering, bribery and corruption and sanctions regimes.
AML and ABC
Anti-Money Laundering (AML) regulations are designed to protect the UK financial system. If a business is covered by the regulations, controls must be put in place to prevent it being used for money laundering by criminals and terrorists.
Anti-Bribery & Corruption (ABC) regulation such as the US Foreign Corrupt Practices Act and the UK Bribery Act, apply extraterritorial powers enabling the pursuit of suspected wrongdoing regardless of where alleged corruption took place and both stress the importance of undertaking due diligence on third-parties.
The due diligence process begins with identification of the prospective client or third-party, often via a simple questionnaire.They will then be put through the watchlist screening process.
Names of companies, individuals and NGOs will be checked against global sanctions lists. The prospective client or third-party will then be subject to risk assessment.
At a high level, a typical risk-based approach will assess factors such as the country from which the prospective client or third-party originated and that jurisdiction’s track record for tackling criminal and other risks.
The data provided from the identification stage will be put through the verification process as the organisation sets out to determine if what it has been told by the prospective client or third-party is bona fide and if there are any hidden risks.
Simplified or Enhanced Due Diligence
For prospective clients or third-parties deemed "low risk", a Simplified Due Diligence process is often applied.
For example, an individual who is resident in the UK requiring a small loan or mortgage may simply be put through the watchlist screening process and at the same time have their identity electronically verified.
For prospective clients deemed to be "high risk", AML rules mandate that Enhanced Due Diligence (EDD) be followed and more in depth due diligence is often applied to higher risk third-party agents as part of the anti-corruption process.
EDD essentially means far more research is undertaken on the entity and checks are not limited just to the entity itself but will also include known associates, subsidiaries and other related entities.
Audits and Reviews
Throughout the due diligence process, all relevant documents retrieved, assessments given and decisions taken will be captured via a thorough audit process.
This will enable the regulated entity to demonstrate to its supervisory agency what steps were taken when the decision was made to transact with the business, customer or third-party.
For higher risk relationships, enhanced due diligence may be repeated annually or, in the case of a third-party agent, at contract renewal or when a significant piece of new business is proposed.
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This article is part of the FreePint Topic Series: What You Need to Know Your Customer (KYC) running from July-September 2014 which includes articles, reviews and expert tips. Register your interest now, and you'll also get a free PDF report with selected premium articles when it's published in September.
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