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USA Real Estate Blog

Client Due Diligence – Maureen Mutua – Medium

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The premise behind client due diligence is that constant monitoring of individual client activity is of supreme importance. Two of the objectives for financial institutions (FIs) for the process should be to ensure compliance without compromise, and minimizing risk exposure during the client onboarding process, and two to spend less money and time and get good results while bearing in mind the type and complexity of each client. The phrase due diligence implies that during client on-boarding a FI is supposed to conduct research and investigation to fully understand and know who their client is. Due diligence should also be conducted yearly on existing clients depending on the level of risk that the FI has placed the client on.

This gathering of information allows FIs to be able to know a client’s source of funds so that in case of suspicion of money laundering, the information can be used to trace, investigate and prosecute. Conducting client due diligence allows financial institutions to discover the dealings of criminal enterprises so as to reveal their sources of illegitimate funds and their networks.

When conducting due diligence, it is possible to reach a dead end. It is at this point that the institution should decide whether to question the client or not take them on. Financial crime can be prevented and identified by conducting due diligence. It is possible for research to reveal hidden criminal networks and suspicious sources of funds before being involved with new clients, third parties, subcontractors,and suppliers. Revealing hidden risk before client on-boarding and during a client’s tenure can protect a FI from taking on risky clients that expose it to reputational damage and exorbitant monetary penalties. A proven way of revealing hidden risk is through Enhanced Due Diligence (EDD).

How does EDD play a role in following the money trail, you may ask. Conducting EDD allows FIs to fully document, store and recover data and intelligence to use in the present and in the future to identify and extenuate legal and reputational damage. EDD is also part of the risk-based approach(RBA) that asserts that financial institution needsto understand that different clients have different levels of risks and must be assessed according to the level of risk they present.

During the due diligence process, compliance practitioners need to know how to identify a client’s source of funds, whether potential and existing clients provide the information or not. Details need to be available of the company’s varied revenue streams, trends and movements of revenue and how they are funded. Sources of funds for individuals could be salaries or savings and for companies could be bank loans, a rights issue, among others. Financial institutions must understand that when the regulator comes knocking, they either have X as a client or not. There is no middle ground.

Financial institutions need to learn how to use latest technologies, tools, and methodologies that will make them less susceptible to risks associated with due diligence. One of the best methodologies is to have a due diligence data-driven portal. FIs need to have a data-driven portal where new and existing client records are kept. Due diligence reports need to be updated every end — year for existing clients and practitioners need to be on the lookout for adverse media and regulatory updates continuously and unceasingly throughout the year. This is so that they can update the portal and therefore escalate or terminate clients as and when required so as to minimize risk levels.

The other valuable tool is the use of risk intelligence data technologies that have international coverage. These platforms can be a good source of information in conducting due diligence and might reveal complexities that financial institutions might not otherwise be aware of when dealing with international or local clients with global networks. The advantage is that they provide access to information that is not otherwise available in the public domain. Hidden important details such as ultimate beneficial owners (UBOs) controlling the legal entity can be exposed.

The use of local language expertise and analysts enables FIs to access primary data available on specific country registers. Additionally, local language expertise provides information that is only available in the jurisdiction’s specific business language format making data collection verifiable and dependable. When it comes to due diligence for higher-risk individuals and countries, FIs should apply EDD measures to business relationships from countries for which this is called for by the Financial Action Task Force(FATF). EDD measures should be in proportionate to the risk presented by the respective country. According to FATF, countries are required to apply countermeasures independently. Countermeasures could be certain actions taken to counteract a threat or minimize risk.

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