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Sanctions Scanner: Best Due Diligence Methods 

In companies, there is some follow-up due to diligence methods applied to prevent money laundering crimes. Some due diligence measures are mandated by AML regulators. In this article, we will examine the due diligence meaning and the methods used for AML.

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Due Diligence Meaning

When we basically look at due diligence meaning, it is an analysis, investigation, audit, or examination performed to confirm the facts of any issue under investigation. In the financial world in general, due diligence meaning that before entering a proposed transaction with another party, that person can be any partner or customer, it requires the examination of the financial records of the natural person and the legal person and similar elements. Due diligence became common practice in the US with the passage of the Securities Act of 1933. With this law, brokers and securities sellers became responsible for clearly disclosing important information about what they sell. When we look at the meaning of due diligence from the side of money laundering, we see that it is quite important.

When we look at anti-money laundering laws and regulations, due diligence requirements are mentioned in almost all regulations. Regulators such as Financial Action Task Force (FATF), HM Revenue and Customs, or the European Union have required due diligence in AML regulations. With current due diligence measures, organizations check whether their customers or partners are actually the people they said in their first transaction. At the same time, with due diligence, organizations not only get detailed information about their customers but also decide what their risks are and take the necessary measures accordingly. There are three types of due diligence used within the scope of anti-money laundering: Customer Due Diligence, Enhanced Due Diligence, Vendor Due Diligence.

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Customer Due Diligence

Customer Due Diligence (CDD) is one of the control procedures that companies apply when making a risk assessment to their customers. Customer due diligence, which is one of the basic requirements of the risk-based AML approach, as stated by regulators such as FATF, allows the potential risks of customers to be identified. Some of the most important risks that companies basically face are money laundering, terrorist financing, and other financial crimes. CDD procedures should be implemented by organizations under AML responsibility. Companies that do not follow CDD procedures may face AML penalties. Customer Due Diligence (CDD) is very important for reasons such as complying with the relevant legislation in institutions, identifying customer risks, providing requested products or services, preventing money laundering and financing of terrorism, and helping to identify and analyze unusual events during the organization’s relationship with other companies.

It is essential to apply customer due diligence (CDD) in new business relationships. After checking the person with whom the business relationship will be established, the business relationship should be started. This eliminates potential risks. Other than that, CDD checks should be done in case of suspicious transactions. There is a certain process of making Customer Due Diligence, this process includes:

  • First, basic information about the customer is collected through Customer Due Diligence. This information includes the customer’s full name, contact information, place of birth and date of birth, nationality, marital status, etc.)
  • In case of doubt, a scan is done to verify identity.
  • Customer activities are examined.
  • The ongoing Control process continues, as customer profiles may change.
  • Enhanced Due Diligence is required for higher-risk customers.

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Enhanced Due Diligence

Enhanced Due Diligence (EDD) is designed to handle high-risk and large transactions, EDD measures are taken in these transactions because CDD measures are not sufficient. It is a fact that risky customers and transactions pose a greater risk to the financial sector. EDD is a KYC process that provides a higher risk of scrutiny and emphasis. EDD, which exceeds the CDD, tries to create a higher identity assurance by evaluating the risk category of the customer by taking the customer ID and address. Also, when money laundering through your service and product or customer is an increased opportunity from terrorist financing, a high-risk situation can arise, so EDD is required to reduce the increased risk. There are some situations that require EDD, as an example, we can give the following:

  • Politically Exposed Persons (PEPs) or close spouses or family members should undergo a more comprehensive review process.
  • Enhanced Due Diligence measures are required for any business in Europe in a country on the High-Risk Third Countries list.
  • Some relationships, such as shell banks, also require EDD.
  • Sectors at higher risk of money laundering, such as gambling, also often have EDD requirements.
  • EDD is important in countries that are blacklisted to fund or support terrorist activities.
  • EDD processes are important in countries that are recognized for common levels of corruption determined by trusted sources.
  • EDD measures may be required in private and correspondent banking.

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EDD measures have some procedures such as Use a Risk-based Approach, Analyze the Origin and Ultimate Useful Ownership (UBO) of Funds, Find Additional Credentials, Transaction Monitoring, Adverse Media, Visit On-site, Prepare Your Report For More Investigation Strategy, Develop an Ongoing Risk-Based Monitoring Strategy.

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Vendor Due Diligence

Vendor Due Diligence (VDD) is fundamentally involved in business relationships between companies. If the shares of any company go on sale, potential buyers should investigate this sale thoroughly and create a report, at this point, it is the seller due diligence that helps both the seller and the buyer. VDD reports, especially used by financial institutions, are used to evaluate potential sellers. VDD is deemed necessary both to reduce threats to business operations and to reduce compliance risk and reputational risk. Therefore, VDD is important for AML / CTF.

Vendor Due Diligence the report is conducted by a third party and presented to potential investors. Vendor Due Diligence has some important goals. For example, to learn about the problems of the companies in detail, to sell successfully at the best price, to increase the purchase price, to identify the critical business factors for the future performance of the companies, to see the potential risks in the buyer organizations, to ensure that the business plan is seen clearly and for the sellers. To improve the quality of the offers received.

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Published on Sanctions Scanner

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