Due diligence failures can result in significant penalties independent of reporting errors. Understanding requirements and consequences is essential for compliance.
Due Diligence Standards
CARF requires:
- Self-certification collection
- Reasonableness verification
- TIN validation
- Ongoing monitoring
Due diligence is not just about collecting information. It requires active verification that the information provided is reasonable and accurate.
Failure Types
Collection Failures
Not obtaining required self-certifications from users.
Validation Failures
Not verifying TINs or assessing reasonableness of information.
Monitoring Failures
Not detecting changes in circumstances that affect reporting.
Systemic due diligence failures affecting many users are treated more severely than isolated incidents. Process-level issues indicate deeper compliance problems.
Penalty Determination
Factors considered by authorities:
- Number of affected users
- Severity of gaps
- Duration of non-compliance
- Remediation efforts
Remediation
If gaps are discovered:
- Immediate process correction
- User outreach for missing information
- Documentation of remediation
- Reporting of gaps to authorities if required
Compliance Enhancement
- Regular due diligence audits
- Automated validation systems
- Staff training
- Process documentation
Conclusion
Due diligence is foundational to CARF compliance. Inadequate processes create both reporting and penalty risks.
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