Customer Background Checks: How to Setup a Customer Due Diligence Program and Avoid Failure

As we have seen repeatedly, the consequences of not conducting customer background checks and due diligence can be severe for businesses. The most recent example is the popular cryptocurrency exchange Coinbase:

  • The New York State Department of Financial Services (NYDFS) has found that Coinbase violated anti-money laundering laws by not conducting adequate customer background checks.
  • The NYDFS first identified problems at Coinbase during a routine supervisory examination in May 2020 and found "significant deficiencies" in various compliance programs, including customer due diligence procedures, transaction monitoring systems, and anti-money laundering risk assessments
  • As of 2021, Coinbase had a backlog of over 100,000 unreviewed transaction monitoring alerts and a backlog of 14,000 users requiring enhanced due diligence background checks.
  • The NYDFS identified two instances where Coinbase's non-compliance put the company and its customers at risk.
  • Coinbase will pay a $50m fine to the NYDFS and must spend $50m on improving its compliance program

To read more information about the Coinbase issue, click here to view the write-up by techcrunch.

The risks go beyond just financial penalties and reputational damage. By not conducting Customer Due Diligence (CDD) and background checks on customers, businesses may inadvertently become involved in criminal activities, such as money laundering or terrorist financing. This can lead to criminal investigations and charges, which can have devastating consequences for both the business and its owners. Plus, conducting customer background checks allows you to identify if customers may have financial issues that may affect payment.  

So, how can you protect your business and ensure that you are conducting customer due diligence effectively? Follow these steps:

1. Determine and document your CDD requirements:
This will depend on the nature of your business, the type of customers you serve, and the regulations you must comply with. Financial Crimes Enforcement Network has published a list of requirements for Banks and brokers or dealers in securities but can be used for any industry.
2. Develop a CDD policy and procedures:
Outline the steps you will take to verify the identity of your customers, assess the risk of money laundering and terrorist financing, and conduct ongoing monitoring of your customer relationships.
3. Train your employees:
Ensure that all employees involved in the customer due diligence process are properly trained and have the necessary knowledge and skills to identify and mitigate the risk of money laundering and terrorist financing.
4. Conduct background checks on companies and their owners:
This can include reviewing public records, checking with trade associations and industry groups, talking to current or former employees, and researching the company's online presence.
5. Conduct risk assessments:
Determine the level of risk associated with each customer based on factors such as their business or personal profile, the nature of the products or services being provided, and the geographic location of the customer.
6. Implement ongoing monitoring:
Customer due diligence is an ongoing process that should be conducted throughout the duration of your customer relationships. This includes monitoring transactions for any unusual or suspicious activity and conducting periodic reviews of your customer relationships.

Don't put your business at risk by neglecting customer due diligence. Follow these steps to set up a Customer Due Diligence program that includes conducting background checks on customers and their owners, and protect your business from the dangers of fraud, money laundering, and other illicit activities.  

CS Business Screen can help you develop a program that keeps your business safe and compliant. Contact us today.

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