Customer Due Diligence Checks: Your First Line of Defence
Jinfo Blog

By Neil Marshall

Abstract

Anti-Money Laundering and Know Your Customer/Customer Due Diligence expert Neil Marshall explains the importance of Customer Due Diligence checks and how they can be used as a first defence against money laundering. He illustrates how failing to carry out due diligence checks can have ramifications beyond the obvious into areas such as company reputation.

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Terrorists and their ilk will concoct new ideas to finance their destruction. Money launderers will always find ways to turn their proceeds of crime into legitimate money. It will continue as long as crime does.

Company structures are becoming increasingly technical, not necessarily for misuse, though criminals are wise to certain "vehicles" being facilitators of cleaning money, as they carry no individual’s stamp. The further a criminal is able to distance himself from a transaction, the more successful his "cleaning process".

We can never guarantee that anyone is who they say they are anymore. For these reasons banks especially are required to understand the true route of a client’s ownership, control and wealth.

Due Diligence Isn't A "Nice to Have"

Customer Due Diligence checks are used as a first defence against money laundering for a regulated company, also more so for unregulated companies. There are new tools available to the market each year, generally they become more sophisticated to move with the times. Many look for source of ownership and connection to group companies to mitigate the risk to an institution. However, in recent years the understanding of business relationships a client may hold are increasingly under the microscope as entities look to minimise risk to which they may be exposed, including those risks which may not be so apparent.

Your Reputation Could Be at Stake

As an example, a large, well known oil & gas company uses a charterer of ships which is not under direct control of the oil & gas company to transport oil from Port A to B. The ship suffers a force majeure, causing a catastrophic oil spill and it later transpires that the ship had not been maintained to current safety guidelines. Who is at fault? The shipping company, absolutely.

However, the oil & gas company has just walked into the biggest reputational damage situation they are ever likely to suffer – by not conducting due diligence on the business partner. There are similar cases past and present that have threatened to destroy reputations. Companies can take decades to build but can be easily forgotten in an instant should they pose a risk to the public, for instance.

Tools to Mitigate the Risks

Similarly, with the risks posed by money launderers, the emphasis is to find out this information, beyond any reasonable doubt, and prior to establishing a business relationship. Tools have become risk mitigators to give an institution the comfort they require to transact with a new counterparty. Those cleansing money are often not afraid to lose a little if the outcome is a lump sum of "clean cash".

FreePint Subscribers can log in now to read more in Neil's full article: A Banking Utility Belt - a Brief Guide to Tools Available to Mitigate Risk. Whilst his article highlights tools being used throughout the industry at the current time, Neil is not advising or recommending any particular product.

Editor's Note: Compliance in Context

This article is part of the FreePint Topic Series: Compliance in Context, which ran from September to October 2013. You can still register your interest to receive a free copy of the FreePint Report: Buyer's Guide on Regulatory Compliance published in October.

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