A key component of the Know Your Customer (KYC) process and refers to the steps taken by financial institutions to identify and verify their customers’ identities, understand the nature of their business activities, and assess the potential risks associated with the customer relationship. The main objectives of CDD are to:
- Identify and verify the customer’s identity using reliable and independent sources of information.
- Understand the purpose and intended nature of the business relationship.
- Determine the customer’s risk profile based on occupation, source of funds, transaction patterns, and geographic location.
- Conduct ongoing monitoring of customer transactions to detect suspicious or unusual activities.
CDD measures may vary depending on the customer’s risk profile. For low-risk customers, simplified due diligence (SDD) may be sufficient, which involves obtaining basic information about the customer and verifying their identity. For high-risk customers, enhanced due diligence (EDD) is required, which involves more extensive background checks, obtaining additional information about the customer’s business activities, and conducting more frequent and intensive monitoring of transactions.
CDD is a continuous process that should be carried out throughout the customer relationship. Financial institutions must regularly review and update customer information and risk profiles to ensure they remain accurate and up-to-date.
Effective CDD is essential for preventing financial crimes such as money laundering, terrorist financing, and fraud. It helps financial institutions identify and mitigate risks associated with their customers and comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. Failure to conduct adequate CDD can result in significant legal and reputational risks for financial institutions.