What is Customer due dlligence (CDD) and it's importance in AML?

Customer due diligence (CDD) is a key part of anti-money laundering (AML) compliance, helping businesses verify who their customers are and assess the risks they may pose, to ensure they are not involved in financial crime. In this article, we’ll explore what CDD is, why it’s important, what it involves, when it is required, and the benefits it brings to regulated organisations.

Customer due diligence is the processes used by financial institutions to collect and evaluate relevant information about individuals or businesses who are a customer or potential customer. It is a regulatory requirement part of the know your customer (KYC) and AML compliance. According to SWIFT, uncovering potential risks through basic CDD involves collection and analysis of data from a variety of sources including the identity of a customer, activities they’re engaged in, markets they operate in, other entities with which they do business and the customer’s risk profile.

Customer due diligence is a key requirement as described by the Financial Action Task Force in its recommendations,the EU AML Directives, the Financial Crimes Enforcement Network (FinCEN) and other regulators around the world to ensure organisations remain compliant. It helps identify and verify customers to protect businesses from being used to launder illicit funds.

A thorough CDD process typically includes:

• Collecting personal identification information (e.g. name, date of birth, address, national ID or passport)

• Verifying documents against official sources

• Collecting business information (e.g. company registration, beneficial ownership, financial statements)

• Establishing the customer’s purpose of the relationship

• Assigning a risk profile based on activity, geography, and type of customer

• Screening against sanctions lists and politically exposed persons (PEPs)

• Ongoing monitoring of transactions and behaviour

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CDD is required in a range of situations, including:

• Establishing a business relationship (e.g., opening a bank account or signing a service agreement)

• Carrying out occasional transactions that exceed set thresholds

• There is a suspicion of money laundering or terrorist financing, for example, when there is a material change in the customer's profile, ownership, or transactional behaviour

• There are doubts about the veracity or adequacy of previously obtained customer identification information

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Implementing a robust CDD process offers multiple benefits:

• Avoiding regulatory fines and enforcement actions from non-compliance

• Protecting your organisation’s reputation by preventing money-laundering and fraudulent activity

• Gaining a deeper understanding of customers and their behaviours

• Supporting law enforcement and regulatory authorities in preventing crime

• Enabling smarter, risk-based decision-making

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