What is Simplified Due Diligence and when is it appropriate?

Written by Stephen Williamson, Senior AML Consultant at FCS Compliance

Author’s note: In my last newsletter article, you may have seen that I spent some time explaining when Enhanced Due Diligence (EDD) is required and what that meant from a practical perspective. The article was very popular, and it certainly did get the conversation started; thank you for those of you who I spoke to on the topic!

Given this positive engagement, I thought that this time around I would focus on Simplified Due Diligence (SDD). But what exactly is SDD, when can you use it, and how does it fit into your compliance obligations? So…

What Is Simplified Due Diligence?

In a nutshell, Simplified Due Diligence is a less intensive form of Customer Due Diligence. It’s designed for situations where the risk of money laundering or terrorist financing is low. While full Customer Due Diligence (CDD) might require detailed checks such as verifying the customer’s identity and the source of their funds SDD allows for a more streamlined approach. You can reduce the amount of information you collect, verify fewer details, and in some cases, negate ongoing monitoring.

When Can Estate Agents Use SDD?

As tempting as it might be to use SDD in every transaction, there are limited circumstances about when it’s appropriate. You can apply Simplified Due Diligence only if a transaction is considered low risk according to MLR 2017.

Here are some common low-risk situations where SDD could apply:

1. Solicitors acting as Executors in a probate matter
2. Large corporate institutions in a redevelopment, i.e. Battersea Power Station
3. Banks acting as instructing organisations in repossessed properties
4. Regulated financial institutions in jurisdictions such as Jersey, Guernsey etc

But remember, you need to prove that a transaction is low risk. Estate agents must still carry out a risk assessment, taking into account the nature of the business relationship, the client’s background, and the transaction’s details.

Balancing Simplicity with Responsibility

Applying SDD isn’t about cutting corners; it’s about applying the right level of due diligence for the risk at hand. Estate agents who misuse SDD could find themselves in hot water with regulators. Therefore, it’s critical to ensure that you:

• Conduct a thorough risk assessment before deciding whether to apply SDD.
• Keep records of why you chose SDD for a particular transaction.
• Stay vigilant. Even in low-risk situations, money laundering can occur.

Conclusion

Simplified Due Diligence can save you time and resources, but it’s not a free pass to skip compliance. Understanding when and how to use SDD effectively will help protect your business from risk while keeping you compliant with both the Money Laundering Regulations 2017 and the Proceeds of Crime Act 2022. FCS Compliance has helped many businesses with their CDD needs, whether that is managing the entire CDD function or supporting with one-off cases, we are here to help, contact us.

Written: October 2024