Customer Due Diligence (CDD)

Customer Due Diligence (CDD) is a process used by financial institutions and other regulated entities to verify the identity of their clients and assess the potential risks of illegal activities such as money laundering and terrorist financing.

Key Points:

1. Identity Verification: CDD involves collecting and verifying information about a client’s identity, including name, address, date of birth, and identification numbers. This can be done through official documents such as passports, driver’s licenses, or national ID cards.
2. Risk Assessment: Institutions assess the risk level of each client based on factors such as the nature of the client’s business, transaction patterns, geographic location, and the client’s source of funds.
3. Ongoing Monitoring: CDD is not a one-time process. It requires continuous monitoring of clients’ transactions and activities to detect and report suspicious behavior. This includes updating client information and reassessing risk profiles as needed.
4. Enhanced Due Diligence (EDD): For clients deemed high-risk, institutions must conduct Enhanced Due Diligence (EDD), which involves more detailed and comprehensive checks, including deeper investigations into the client’s background and business relationships.
5. Regulatory Requirements: CDD is mandated by global AML regulations and standards, such as those set by the Financial Action Task Force (FATF), the European Union’s Anti-Money Laundering Directives (AMLD), and national laws in various jurisdictions.
6. Documentation and Record-Keeping: Institutions must maintain records of all CDD processes, including the information collected, verification steps taken, and the results of risk assessments. These records are essential for compliance audits and regulatory inspections.
7. Customer Risk Profiling: Clients are categorized into risk levels (low, medium, high) based on CDD findings, which helps institutions apply appropriate levels of scrutiny and monitoring.
8. Suspicious Activity Reporting: If CDD processes identify potential risks or suspicious activities, institutions are required to file Suspicious Activity Reports (SARs) with relevant authorities.

CDD is a cornerstone of effective AML programs, helping institutions mitigate the risk of financial crimes by ensuring they know their clients and understand their financial behaviors.