CDD - What is it and why is it important?

Customer due diligence (CDD) is a process used by financial institutions to verify the identities of their customers and understand the purpose of the account relationship in order to identify and mitigate the risks of money laundering and terrorist financing. CDD is a fundamental component of any effective anti-money laundering (AML) program and it is important for compliance officers to maintain a thorough understanding of the process.

CDD should be conducted as early as possible in the account relationship, ideally before any transactions are conducted. This allows financial institutions to verify the identity of the customer, any person acting on their behalf, or the ultimate beneficial owner of the account. CDD should also be conducted throughout the life of the transaction.

The level of CDD required depends on the risk of money laundering or terrorist financing posed by the customer. In some cases, a simplified due diligence (SDD) process may be sufficient if the risk is very low. However, not all jurisdictions permit the use of SDD and there may be restrictions on when it can be used.

Standard due diligence is the most common level of CDD and involves a detailed analysis of the new customer, recognizing that there is a potential risk of money laundering or terrorist financing, but it is considered unlikely that such risks will be realized.

Enhanced due diligence (EDD) is the highest level of CDD and is used when a customer is deemed to be high risk, such as a politically exposed person (PEP) or a business from a high-risk jurisdiction. EDD involves a more thorough investigation of the customer and may include obtaining additional identification materials, verifying the source of funds or wealth, and applying enhanced scrutiny to the nature of the business relationship.

The CDD process typically includes the following steps:

1. Identifying and verifying the customer's identity using reliable, independent source documents, data, or information.
2. Identifying and verifying the identity of the beneficial owner.
3. Conducting ongoing due diligence throughout the business relationship and scrutinizing transactions undertaken throughout the relationship.
4. Verifying that any person claiming to act on behalf of the customer is adequately authorized.
5. Obtaining additional customer identification materials (for EDD).
6. Establishing the client's source of funds or wealth (for EDD).
7. Applying enhanced scrutiny to the nature of the business relationship (for EDD).

By conducting CDD in a risk-based approach and following best practices, financial institutions can effectively identify and mitigate the risks of money laundering and terrorist financing.