Full Customer Due Diligence – Even for Known Clients

As a Principal firm, a common question we receive from prospective Appointed Representatives (ARs) is whether it is necessary to conduct full Customer Due Diligence (CDD) on clients they already know well, such as long-standing business contacts or personally known individuals. While it might seem redundant to perform rigorous checks on familiar clients, financial regulations dictate that thorough CDD is always required — even if the client is a personal acquaintance or a well-established business.

Why is Full CDD Necessary for Known Clients?

Regulatory Compliance: Financial Conduct Authority (FCA) regulations, in line with the UK’s Money Laundering Regulations 2017, mandate that firms undertake CDD for all customers prior to the commencement of a business relationship to mitigate the risks of money laundering and terrorist financing. Familiarity with a customer does not exempt a firm from these legal requirements. Skipping or relaxing CDD procedures can expose your firm to serious compliance breaches and potential penalties from the FCA.
Risk of Complacency: Knowing a customer personally can create a false sense of security, leading to complacency in verifying the customer’s identity and understanding their business activities. Even long-standing clients can undergo changes in their business structure, ownership, or financial situation that may increase their risk profile. Therefore, relying on personal knowledge alone is not sufficient; a consistent and unbiased approach to CDD with ongoing reviews of customer information helps avoid overlooking any red flags.
Evolving Risk Landscape: Today’s risk environment is complex and ever-changing. Individuals and companies that seemed low risk in the past may become involved in higher risk activities without your knowledge. By maintaining robust CDD, including ongoing monitoring, your firm ensures that any changes in the customer’s profile or behaviour are detected early, allowing for timely intervention if required.
Documenting Due Diligence: Comprehensive documentation of CDD processes is essential. Even if a client is personally known, you must keep detailed records demonstrating compliance. Should an audit or investigation occur, the ability to show that appropriate checks were completed is vital to protecting your firm from potential allegations of negligence.

What Does Full CDD Involve?

Full CDD typically includes verifying the customer’s identity using reliable and independent documents, assessing the purpose and nature of the business relationship, and monitoring transactions for any unusual or suspicious activity. It also involves understanding the client’s source of funds and wealth, especially in high-risk scenarios.

Balancing CDD with Customer Relationships

While performing full CDD can seem bureaucratic, it is an integral part of operating a compliant and secure financial services firm. Ensuring that this process is clearly communicated to clients helps set expectations and reinforces the professionalism and regulatory obligations of your business.

In conclusion, even if you know a customer well, full CDD should never be skipped. It not only keeps your firm compliant but also protects both you and your clients from unforeseen risks in an increasingly complex financial environment.

Further information:

FCA Handbook: https://www.handbook.fca.org.uk/handbook/FCG/3/?view=chapter#:~:text=Firms%20must%20identify%20their%20customers,%2C%20where%20relevant%2C%20beneficial%20owner.
UK Money Laundering Regulations 2017: https://www.lawsociety.org.uk/topics/anti-money-laundering/quick-guide-to-the-mlrs
HM Treasury - Anti-Money Laundering Guidance: https://assets.publishing.service.gov.uk/media/5a7ca82bed915d7c983bc190/aml_hmt_approved_guidance.pdf