Customer Due Diligence

Due diligence process is a term that is useful and applied in many ways. But in finance, due diligence means collecting the seller's and /or buyer's information so that one knows every financial detail before jumping into any complex or grand investment with them. 

Due diligence comprises an analysis of the project's purpose, pre-analysis of the financial business event, full document check, analysis of the business event and plans, risk analysis, and final benefitting certain and ongoing monitoring. 

In this digital era, we all do online shopping and purchasing. But since everything is striving to turn online daily, the authenticity of the products is decreasing, which leads to an increase in the number of frauds. 

This is why we all check online reviews of buying and/or purchasing anything. This is what due diligence looks like in financial terms. Before committing to any grand business deals, if someone checks their documents, this is due diligence. 

Due Diligence Importance

Due diligence is a very crucial step in any investment. It helps the customers become aware of many things and phenomena. 

It's important in legal aspects. It is beneficial for both buyers and sellers. It assures the purchaser that they are doing an accurate deal. 

Also, it helps the seller know the business level they are stepping into. 

Due diligence can be of many types. This includes financial due diligence, legal, due diligence, M&A tax due diligence, and operational due diligence. 

There are a lot of documents that one may require during the process of due diligence, which comprises articles of association, memorandum of association, certificate of incorporation, Financial statements, income tax returns, bank statements, bank documents, utility bills, employee records, and operational records.

All the details gathered in the process of financial due diligence are set to be public at the Ministry of Current Affairs (MCA) site for review and analysis. 

Customer Due Diligence

A new or known term in diligence that exists is that of customer due diligence. In the process of customer due diligence, the information is collected by the customer and thereby thoroughly reviewed and evaluated. 

It is an important and crucial step to carry out, especially for the organizations in the financial industry for Financial Crime Compliance (FCC). 

Some businesses handle financial transactions on behalf of customers. This is where customer due diligence comes in to play a role. Customer due diligence is put into banks, brokers in mutual funds, and finance merchants. 

There are certain components of customer due diligence 

· Customer identification and verification

· Grasping the essence and target of the business-customer relationship 

· Beneficial ownership identification and verification

· Ongoing monitoring for suspicious activities

Customer due diligence is also of varied types, including standard customer due diligence, simplified customer due diligence, and enhanced customer due diligence. 

Four Customer Due Diligence Requirements for Businesses

Customer identification and verification

You must get every detail of the customer under this type and form of due diligence. 

Identifying the customer and getting every possible detail is crucial to investing in any business. 

Many frauds happen hereafter; for this purpose, verifying and reviewing the customer's details is important. Moreover, knowing which type of customer you are dealing with is crucial. 

Understanding the nature and purpose of the business-customer relationship 

It is important for you to understand the reason and/or purpose for which the customer wants to be with you in this business. 

Subsequently, understanding why the customer wants to be with you in this business and what specific component drives him or her to invest here. 

Having this understanding is crucial to moving forward. Also, to know the customer's relationship with the business he wishes to invest in. 

Beneficial ownership identification and verification

This step or requirement plays a role when the customer acts on behalf of another entity. This step does not depend on any specific type of customer. 

Ongoing monitoring for suspicious activities

As mentioned above, in this digital era, there are chances of many activities that create suspicion in business. 

And cheating and/or the possibility of cheating destroys the relationship the customer shares with the business. Henceforth, you need to keep an eye on every activity. 

In conclusion, due diligence is a crucial process in finance. But if we dig deeper, you will understand that due diligence is an umbrella term. 

There are a lot of terms and concepts that exist under this term. Customer due diligence happens on behalf of the customer. A lot of documentation is necessary under this type of customer due diligence. This step is necessary to avoid any discrepancy in future.