Customer Due Diligence (CDD)

Enterprises and financial institutions have the responsibility to identify their customers as a part of their regular onboarding process. This is essential to evaluate any potential risk of cybercrime such as money laundering (ML), which can often lead to terror financing (TF).   

What is meant by Customer Due Diligence?

Customer Due Diligence is the process of acquiring identity information from the customer to assess the overall risk associated with them. It takes into account the name, address, and an official identity document of the onboarding user to evaluate their background. CDD is an essential part of the risk-based Anti Money Laundering (AML) approach which plays a key role in mitigating money laundering and other financial crime. 

Importance of CDD in KYC

CDD is an essential component of the Know Your Customer (KYC) process which comprises customer identification. The basic difference between the both is that KYC usually takes place during client onboarding while CDD checks may continue throughout the customer-business relationship. CDD is essential to ensure KYC standards and assess the customer’s risk profile. 

How is CDD Performed?

The Customer Due Diligence process starts with collection of user data, entails verification of the acquired information and concludes with the sharing of results. Below is a list of information which is essential to verify the customer’s identity:

• Complete name
• The residential address 
• Email address and contact number
• The date and place of birth
• A government-issued ID number usually an SSN

Often businesses require additional information such as gender, marital status and occupation for further identity verification of the customer. 

In case the customer is a business entity, the nature of information changes. Some of them are listed below:

• Name and type of corporation
• Date and place of incorporation
• The Ultimate Beneficial Owners (UBOs)
• Details about the shareholders, directors and senior management

Background Checks

In CDD, the customer’s name is screened against a collection of watchlists (blacklists and gray lists), in-house databases or other records regarding sanctioned entities. Some parameters against which the user’s name is screened include Politically Exposed Persons (PEPs) lists, sanctioned entities and individuals, criminal and terrorist background, or any adverse activity reported in the media. It also helps organizations meet the stringent AML compliance requirements by global regulators like EU and FATF.  

When do you need CDD?

When a business compliant under KYC/AML regulations establishes ties with customers or other entities, CDD is of key importance. It helps organizations verify the identity of their prospects and keep a vigilant eye on suspicious activities related to their accounts. KYC and CDD are most commonly performed in the following scenarios:

Client Onboarding: Before establishing a new business relationship, CDD runs a series of checks to determine if the individual’s identity is fake or real. This allows enterprises to onboard customers after properly assessing their risk profile. 

In-between Transactions: Customer Due Diligence is important whenever a customer performs occasional transactions through a business platform. CDD checks keep track of 

high-risk entities in foreign countries by monitoring the volume and frequency of transactions.   

Potential Cybercrime: In case of a money laundering and financial crime suspicion, organizations need to perform CDD against the customer’s profile. 

False Proof of Identity: In case a customer is initiating a business relation using fake and compromised identity documents, businesses need to implement an additional layer of CDD to further investigate any possible fraud.   

Automated Ongoing Monitoring 

Customer identity is once verified at the time of onboarding through detailed KYC procedures, but later verifications are as much important. Automated systems allow ongoing monitoring of the customer’s financial activities. These are especially helpful in detecting any suspicious transactions which could result in money laundering and illicit criminal activities through the dirty money. Continuous monitoring checks often come as part of Enhanced Due Diligence which allows online and financial businesses to stay compliant with AML regulations.  

Which Industries can benefit?

Here are some industries which can use document verification to streamline their operations:

• E-commerce stores
• Insurance firms
• Healthcare industry
• Real Estate businesses
• Banking institutes
• Cryptocurrency exchanges
• Sharing economy
• Travel industry
• Legal sector