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Jun 2, 2020

What is Due Diligence and its relationship with KYB and KYC

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What is Due Diligence and its relationship with KYB and KYC

The term Due Diligence is used in different ways. Its use and application vary depending on the sector, area or type of process in which it is implemented. 

It is generally used for concepts and situations in which an investigation must be carried out of a natural or legal person prior to a contractual relationship or other types of exchanges. It is important to keep in mind that the identification of the subject (company or individual) on which to carry out the due diligence process is an essential previous step.

Download here for free the complete guide on digital identification.

Due Diligence term meaning

Due diligence refers to the investigation itself. In this way, we talk about a due diligence process, or legal audit, to refer to previous review operation of a person or company in order to evaluate possible risks when establishing an economic relationship with it.

The research focuses on understanding the reality of the company or person and making sure without a doubt that they have not committed or are not committing any crime, and also that they are not considering committing it. It is a process of information research carried out by one of the agents in a negotiating relationship in order to assess risks and the situation at the time of the negotiation.

It is a very common process in the field of B2B (Business-to-Business) buying and selling and in the acquisition or merger of companies. In some cases, it is also known as a “purchase audit”. We could say that the standard definition is “research on a person or company prior to the signing of a contract or investment“.

Its relation to KYB and KYC

In order to get information about a business or person, the first step is to identify. In other words, making sure that the person or business really is who they say they are. Once the identification has been made, relationships of trust can be established and the due diligence process can be developed.

Due Diligence is closely related to the term KYB (Know Your Business). The previous step in a remote due diligence process is the identification of the subject to investigate. This process of digital identification of a business to confirm that the business is what it should be is known as Know Your Business.

Learn about the Know Your Business (KYB) process here.

Similarly, the KYB process is a variant of the standardized and globally used KYC (Know Your Customer) Process. This time, known as Client Due Diligence (CDD)

Most companies that want to acquire customers remotely have the legal obligation to identify their users with reliable and secure identity verification systems. This process has evolved from KYC to eKYC (electronic Know Your Customer), representing a revolution in contractual relationships between users and companies.

This is widely known in the financial sector, where enhanced due diligence is required even for existing clients who were not subject to this procedure. Entities manage risk models used to identify high-risk companies and / or clients.

In any due diligence process directed towards an individual, or also self-employed, the KYC process is the first step in order to carry out the investigation.

Find out here how digitization has reconstructed processes.

Due diligence and related regulations

Like all legal procedures, due diligence must comply with all current regulations that are affected by, given the nature of the process. In this sense, the regulations that are involved are:

  • GDPR: General Data Protection Regulation rules the protection of people in relation to the treatment of their personal data and its use. Any due diligence process must strictly comply with GDPR due to the treatment of the data of the subject investigated by the company.
  • AML5: The Fifth Anti-Money Laundering Directive, or 5AMLD, regulates all aspects of actions against money laundering in all kinds of processes, both offline and online. It is a mandatory standard that affects all industries, but especially the financial and banking sectors, developing techniques to prevent fraud and money laundering.
  • eIDAS: electronic IDentification, Authentication and trust Services Regulation lays the foundations for the identification of companies and users, granting the seal of trust for qualified companies. It rules all aspects related to electronic signature and online exchanges.

Download here the complete guide to AML5 and eIDAS regulations for free.

Basic characteristics of the Due Diligence process

The process has a series of basic characteristics that standardize and regulate it in the face of good practices in this type of risk analysis methods:

  • All information is confidential between both parties and must be treated in accordance with the established regulations (RGPD, AML5, eIDAS…).
  • In much of the negotiations, it is a mandatory process by law. Good faith is always assumed by the information giver.
  • It is recommended that it be done by a third party agent. A company specialized in due diligence, KYB or KYC processes.
  • It must always have a clear professional objective: to identify the contingencies of the party with whom you are going to negotiate; and not other intentions.
  • It must be given in a short period of time and be recent so that it is reliable and true.

Electronic IDentification, eID, as a recognized Regtech partner, can accompany businesses in their due diligence verification and identification processes.

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