The Importance of Due Diligence in Indonesia

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are vital elements of effective customer risk management for companies, especially financial institutions in Indonesia. It can be seen in the increasing number of requests for investigations via any due diligence.

CDD and EDD are also known as background checks or background reports on individuals or companies. CDD and EDD enable companies to quickly and conveniently gather necessary information, and to effectively determine the risk a customer or an entity poses to your business.

In this article, Cekindo will compare the difference between Customer Due Diligence and Enhanced Due Diligence.

Customer Due Diligence (CDD)

CDD is a process that collects relevant customer’s profile and information. Then, the data will be evaluated for potential terrorist financing or money laundering risks.

Once the CDD is done, a risk rating will be given to a customer, showing the level of risk the customer presents to a company. A risk rating usually helps a company to decide how they are going to proceed with proper checks and adequate solutions.

Compulsory CDD by Financial Institutions in Indonesia

Under the latest issuance of Regulation No. 14/27/PBI/2012 by Bank Indonesia on the Implementation of the Anti Money Laundering and Prevention of Terrorism Funding for Banks, all banks are required to conduct Customer Due Diligence, effective from December 28, 2012.

Major CDD procedures that a bank must initiate include the following:

• Requesting information from the customers or entities
• Identifying a beneficial owner of an account and executing CDD on the beneficial owners
• Verifying documents submitted by customers
• Constantly updating and observing data obtained from customers

CDD is the most basic due diligence that is performed on most customers – both walk-in customers and prospective customers. Besides, a CDD is mandatory where there is a suspicious financial transaction or doubtful information submitted by the customers.

According to Regulation No. 14/27/PBI/2012, due diligence that is a step further than the CDD must be performed by a bank if customers are considered as high-risk.

This detailed due diligence is called Enhanced Due Diligence which we will discuss in the following section.

Enhanced Due Diligence (EDD)

Enhanced Due Diligence is a process where a customer has been assessed and determined to be at a heightened risk to a company.

Often, the main process of EDD is to get approval from senior management prior to establishing a relationship with customers. The company should also take reasonable measures to evaluate the source of wealth and funds.

Here are some of the examples of high-risk customers or transactions that make the EDD a compulsory process:

• A politically exposed person (PEP) or a person classified as “high risk”
• Terrorists
• Transactions with another high-risk party, such as a high-risk country
• Accounts opened virtually and not face-to-face
• Transactions that deviate from the transaction profile of a customer
• Customers are located in high-risk countries or regions
• Correspondent accounts
• A customer is linked to a PEP

Compulsory EDD in Indonesia

If a customer or a transaction meets one of the above-listed criteria, a financial institution must analyse the customer, purpose of transactions, the source of funds, and all business relationships among all parties involved in a transaction. Stringent observation of the high-risk customer must also be applied as well.

Certain cases such as dealing with a PEP, a financial institution or a bank shall assign a senior relationship manager who has the authority to decline a transaction or to terminate a relationship with the customer.

Protect Your Business Now

Cekindo can help you to protect your company’s reputation and prevent potential financial damages and crimes with our due diligence or background check services. Contact us now to obtain a free quotation.