Due Diligence Checklist: Confirming AML Compliance

Due diligence generally means reasonable care and precautions to avoid potential harm or risk. In the context of KYC and AML, Due Diligence is the process that helps mitigate financial crimes like money laundering. This article is about the due diligence checklist and its use in the customer due diligence process.

What is the Due Diligence Checklist?

Basically, it is a tool used by firms and organizations while conducting due diligence for their clients. It also gives a comprehensive overview of the potential partner or customer for the risk assessment.

It varies depending on the purpose and the scope of the due diligence process and the regulatory requirements. Since there are two main types of Due Diligence Processes so each of them has a different checklist. These types are Customer Due Diligence & Enhanced Due Diligence.

Due Diligence Checklist required for CDD (Customer Due Diligence)

First of all, it needs to be understood that customers with low-risk levels might not require any specific checklist. They can go through a Simplified Due Diligence which is carried out only to identify a customer and not verify him. But as the risk level of a customer increased the due diligence process becomes complex and stringent. For the normal risk level customers, CDD is carried out by having a specific checklist. This checklist contains the documents that the customer needs to provide for identity verification & authentication. Most basic information that is included in the due diligence checklist is as follows:

For Individual Customers:

• Name
• Address
• Date of birth
• Telephone number
• National ID number
• Identity documents
• Mobile network data
• Geolocation
• Selfie
• Live video
• Third-party account verification

For Business clients

• Business registration number
• Company name
• Address
• Operational status
• Key management personnel
• Date of incorporation

Moreover, this checklist can have more requirements based on the jurisdiction and the country's regulatory laws. There may be some third-party information sources that can provide relevant information about the clients and customers as well. So, this falls back on the shoulders of the firm’s compliance officers and KYC AML regulators to clarify and verify. But it is important that the third-party source is a trustworthy and credible source of information.

Enhanced Due Diligence Checklist (EDD)

Once the customer’s risk profile is identified and the risk score is high, Enhanced Due Diligence (EDD) is conducted to deeply verify the customer’s identification details. This requires a comprehensive checklist including more stringent documentation to be provided. Following are the EDD checklist items for KYC:

Identity Verification:

To verify the customer's identity through official documents including a passport, national identity card, driving license, or any other government-issued ID.

Source of Wealth:

Obtaining information on sources of wealth and identifying any red flags or suspicion in the sources of income.

Purpose of the Account:

To understand the purpose of the account and risk assessment of money laundering or terrorist financing activities.

PEP Status:

Determining if the customer is a Politically Exposed Person (PEP) to conduct an in-depth risk assessment.

Ultimate Beneficial Ownership (UBO):

To Identity the ultimate beneficial owners of the customer and identify any potential risks associated with their ownership structure.

Sanctions and Watchlists:

Carrying out sanction screening for the UBOs against international sanctions lists, terrorist watchlists, and other public records.

Reputation Risk:

Conduct a background check on the customer and their UBOs to identify any negative news or public information that may indicate a potential reputation risk.

High-Risk Countries:

Identifying high-risk countries in cross-border transactions and assessing the potential risk associated with them.

Enhanced Monitoring:

Implementing in-depth transaction monitoring for high-risk customers or transactions to identify any suspicious activity.

Ongoing Review:

Conduct regular reviews of the customer's account and activity. It is to ensure ongoing compliance with KYC regulations and identify any potential risks or changes in circumstances.

Additional Measures (Industry-wise) in Due Diligence Checklist

Regulatory compliance:

Mainly, the due diligence checklist depends on the industry and jurisdiction. It is important to ensure that all relevant regulations are complied with and that any potential legal risks are identified.

Intellectual property:

For the use of intellectual property in a transaction, it is important to conduct a thorough review of the intellectual property assets to ensure that they are properly registered and protected.

Cybersecurity:

In today's digital age, cybersecurity risks are an important consideration in any transaction or investment. A cybersecurity review should assess the security of the target's networks, systems, and data to ensure that they are adequately protected against cyber threats. eKYC and blockchain is the latest and trending concept in cybersecurity.

Environmental compliance:

If the transaction or investment involves real estate or manufacturing, it is important to assess any potential environmental risks and liabilities, including compliance with environmental regulations.

Human resources:

While acquiring a company, it is important to conduct a review of the target's human resources policies and practices, including employee contracts, compensation, and benefits.

Financial projections:

In addition to reviewing historical financial performance, it is important to review the target's financial projections to ensure that they are realistic and achievable.

Supply chain:

In the case of a supply chain, it is important to assess the reliability and sustainability of the supply chain and any potential risks or disruptions.

Wrap up

The Due Diligence Checklist is a handy tool for conducting a streamlined risk-based due diligence process. To ensure regulatory compliance for AML and CFT, Due Diligence processes are necessary at different risk levels. Similarly, the checklist makes it easy to confirm that all the KYC document verification requirements are fulfilled.