Customer Due Diligence (CDD) – Everything you should know

Customer Due Diligence (CDD) is extremely important for organisations in various sectors. It plays a significant role in preventing financial crimes and fraud. This article aims to help you understand CDD better and emphasises the need to follow its practices, especially in a world with many fraud risks and increasing financial complexities.

Navigating today’s dynamic financial landscape calls for strong measures against fraudulent activities. The fusion of technology and evolving legal demands makes the Customer Due Diligence process vital for verifying customer legitimacy and promoting transparency. This article will explore CDD’s pivotal roles and its impacts, contributing to a secure and trustworthy financial ecosystem.

Table of Contents

What is Customer Due Diligence (CDD)?

Customer Due Diligence (CDD) is a critical component of Anti-Money Laundering (AML) and Know Your Customer (KYC) policies. Its main purpose is to comply with regulations by identifying and verifying the identity of customers, thereby reducing the risk of money laundering and ensuring transparent and honest business relationships with all potential customers. CDD acts as a powerful defence mechanism to protect an institution’s reputation from those who might attempt to compromise its integrity.

Involving ongoing monitoring of customer activities and behaviours, CDD plays a crucial role in recognising customers and understanding their actions. By aligning these actions with expected norms and evaluating risk profiles, it helps institutions identify potential risks and vulnerabilities. Continuously refining CDD processes, meeting regulatory requirements, and enhancing defences against fraud are essential for institutions.

Types of Customer Due Diligence (CDD)

Customer Due Diligence (CDD) unfolds in three distinctive yet interconnected types – Simplified Due Diligence (SDD), Basic Due Diligence (BDD), and Enhanced Due Diligence (EDD). Each type meticulously adjusts to the corresponding customer’s risk profile:

Simplified Due Diligence (SDD) is the basic level of customer verification used for low-risk customers to confirm they don’t pose any regulatory threats.
Basic Due Diligence (BDD) goes beyond SDD and applies to customers with an average risk. It involves extensive customer identification and understanding of their business relationship.
Enhanced Due Diligence (EDD) is for high-risk customers, like Politically Exposed Persons (PEPs), and requires thorough research on their personal, financial, and business backgrounds. Regular reviews are needed to keep their information up-to-date.

It is the right blend of these three types of CDD that empowers a robust risk management strategy. By delving into practical examples, we aim to demonstrate their application in concrete terms and elucidate their role in mitigating fraud risks.

The steps of Customer Due Diligence

In order to bring clarity to the concept of Customer Due Diligence (CDD), we will delve into its progressive stages. These stages trace the journey from initial contact with a potential customer, through to maintaining their records over the length of the business relationship. This systematic approach to CDD helps ensure the utmost compliance with regulatory standards, providing a robust safeguard against fraud. Let’s scrutinise and gain a deeper understanding of these pivotal steps in the process:

Gathering customer information: The first step in CDD involves collecting relevant information about the customer. This could be personal data, business affiliations, or transaction behaviour. The goal is to gather sufficient detail to understand the customer’s nature and purpose of the business relationship.
Identity verification: The second step of CDD is to verify the customer’s identity. This process usually involves checking government-issued identity documents and verifying the provided information using methods such as biometric authentication and passive liveness detection. The purpose is to ensure that the customer is indeed who they claim to be.
Risk assessment: The third step involves an evaluation of the risk associated with the customer. Based on the customer’s KYC information and other relevant factors such as their geographical location, type of business, and transaction patterns, a risk profile for the customer is made. This helps in determining the level of due diligence required.
Ongoing monitoring: CDD is a continuous process, not a one-time activity. Therefore, the fourth step involves ongoing monitoring of the customer’s activities and transactions. This helps to spot any inconsistencies or suspicious actions that may indicate a change in the customer’s risk profile.
Keeping updated records: Lastly, keeping accurate and updated records of customer details and transactions plays a critical role in CDD. This not only helps to maintain a clear audit trail but also aids in meeting regulatory requirements and ensuring readiness for any future inspections or audits.

CDD rests upon these key steps for gathering customer information, verifying identity, and assessing risk. Regular monitoring and updating of customer information to meet regulatory requirements is a crucial aspect of CDD. It’s also important to maintain updated records for future reference.

Customer Due Diligence checklist

When complying with CDD measures and regulations, a structured approach can be vital in assuring all necessary steps are taken. Here’s a simple checklist to help guide your CDD process:

Customer identification: Confirm the customer’s identity correctly using reliable, independent source documents, data, or information.
Customer verification: Review pertinent identification documents such as passports, licenses, or government-issued identification cards. In companies, you may need to verify articles of incorporation, business licenses, and other associated documents.
Know Your Customer (KYC): Understand the nature and purpose of the customer relationship. Gather information about the customer’s business or occupation, understanding their intended transactions or activities.
Risk assessment: Conduct a thorough risk assessment based on customer information, the products/services they require, and their geographic location. This risk profile will help determine what level of due diligence is required—simplified, basic, or enhanced.
Enhanced due diligence: For customers assessed as high risk, conduct enhanced due diligence (EDD). This could involve deeper investigation into business operations, sources of wealth and funds, scrutinizing past transactions, checking against sanctions lists, or the background of the beneficial owners.
Ongoing monitoring: Regularly review and update customer information. Track customer transactions, particularly those that deviate from normal activities. This step is crucial to identify any changes in risk level.
Record keeping: Keep clear records of all customer interactions, documents, identification checks, and risk assessments.
Reporting: If there are suspicions of money laundering or terrorist financing, report them to the relevant authorities. Maintain a strict internal reporting procedure.

Remember, implementing an effective CDD process is more than just a regulatory requirement; it is a critical step in safeguarding your business from financial crimes.

Customer Due Diligence requirements

Customer Due Diligence (CDD) requirements vary across different jurisdictions, but the overall goal remains to prevent financial fraud and money laundering. Typically, businesses must follow these four fundamental steps for a successful CDD process:

Customer Identification Program (CIP): Under the CIP, businesses are required to collect and verify key identifying information about the customer. This may include the person’s name, address, contact details, birth date, and if appropriate, taxpayer identification number. For businesses, this might include additional information such as registration and ownership details.
Customer ‘Know Your Customer’ (KYC) Checks: KYC involves deeper scrutiny, including understanding the nature and purpose of the customer’s activities to assess whether they pose a risk. KYC checks might entail completing a criminal background check, checking against sanctions lists, or screening for politically exposed persons (PEPs).
Risk-based assessment: Businesses must conduct a risk-based assessment for every new customer to understand the potential risk they pose. High-risk categories might include customers from high-risk countries, PEPs, cash-intensive businesses, and non-resident customers. The business relationship should then be managed according to this risk level.
Ongoing monitoring: CDD doesn’t stop once the customer is onboarded. Businesses must continue to monitor the customer’s activities, updating their risk profile and regularly reevaluating their transactions, behaviour, and risk levels to ensure nothing suspicious occurs. Any changes in the customer’s behaviour, activity, or personal circumstances should trigger a review of their CDD.

Compliance with these CDD steps helps businesses to better understand their customers, reduce risk, and adhere to anti-money laundering (AML) rules.

Role of Customer Due Diligence in different industries

CDD implementation, while a constant across various industries, carries its unique challenges and approaches depending on the industry. Some of the industries where CDD plays a key role include:

Banking & Finance: Banks and financial institutions require CDD for risk assessment, identifying high-risk customers such as Politically Exposed Persons (PEPs), and monitoring transactions.
Real estate: Real estate agents deploy CDD to verify client identities, assess money laundering risks, and perform enhanced due diligence for high-risk clients.
Legal industry: Law firms use CDD to assess clients, particularly for financial transactions, by verifying the client’s identity and fund sources.
Healthcare industry: CDD is used by healthcare providers and insurance companies to validate the identities of new customers, assess their insurance credentials, and evaluate potential risks involved.

Case studies, such as the investigation of global banks enabling money laundering by BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ), show that failure to implement proper Customer Due Diligence (CDD) can lead to serious and harmful consequences. These real-life examples emphasise on how crucial effective Customer Due Diligence (CDD) processes are in preventing financial crimes and meeting regulatory requirements across various industries.

Who must adhere to Customer Due Diligence requirements

Customer Due Diligence (CDD) is applicable to a wide range of businesses and industries as discussed above, but primarily to financial institutions and organisations involved in financial transactions. These include but are not limited to:

Banks and credit unions: They need to be sure of the identity of their customers and assess the risk associated with their customers as part of their anti-money laundering (AML) initiatives.
Brokerage firms: Stockbrokers and securities dealers also fall under the umbrella of CDD as they deal with large amounts of money on behalf of their customers.
Insurance companies: Life insurance and annuity companies need to perform CDD to prevent money laundering through policy purchases and payouts.
Cryptocurrency companies: Exchange platforms need to perform CDD to ensure their platforms are not used for illegal transactions.
Money service businesses: Money transfer companies, currency exchanges, and check-cashing businesses need to confirm the identity of their customers to prevent crimes such as money laundering and financing of terrorism.
Real estate agencies: These organisations also need to perform CDD to ensure property purchases aren’t being used to launder money.
Law firms/attorneys: Some legal practices that regulate high-value transactions should apply CDD procedures to prevent financial crimes.
Casinos: With high-volume cash flows, both brick-and-mortar and online casinos fall under CDD to avoid being channels for money laundering.

The application of CDD also extends to any potential customer or business relationship where there is a perceived risk of financial crime or fraud, regardless of the industry.

Solutions for Customer Due Diligence:

In an increasingly digital economy, businesses need innovative tools to enhance CDD processes:

Digital identity verification Tools: Software using biometrics and AI for real-time identity validation.
Customer screening platforms: Tools to check customers against global databases including sanctions lists and PEPs.
Risk assessment software: Tools for categorizing and tracking customer risks.
AML Compliance platforms: Comprehensive solutions combining identity checks, customer screening, transaction monitoring, and reporting.
Ongoing monitoring solutions: Tools that track customer activities regularly to quickly identify suspicious activities.
Reporting tools: Software to create detailed customer reports for audits, regulatory inspections, and improved risk management.

Effective CDD solutions help businesses maintain regulatory compliance, safeguard their reputation, and foster a hassle-free customer experience.

Customer Due Diligence by fraud.com

Embracing a digital-first strategy, fraud.com presents powerful tools that significantly enhance and streamline the Customer Due Diligence (CDD) process.

Udentify is a key player in reinforcing the Know Your Customer (KYC) pillar of CDD. With AI facial and voice recognition technologies, Udentify quickly and accurately verifies customers’ identities. It responsively combats identity fraud while providing a smooth customer experience, thanks to passive liveness detection and reusable biometrics solution. To top it off, frictionless passwordless authentication, accessible via face scanning or voice commands, enhances transaction security while offering a user-friendly interaction.

Moreover, aiReflex, an AI-based fraud prevention suite, plays a vital role in risk assessment – another significant element of CDD. It scrutinises transactions and behavioural patterns in real-time to identify fraudulent activities. Its omnichannel ability enhances financial institutions’ fraud detection capabilities, ensuring only legitimate transactions go through.

Lastly, the collaborative power of fcase fraud orchestration amplifies response strategies to potential threats. By offering a single customer view, fcase enhances ongoing monitoring practices by providing real-time, centralised intelligence on potential fraud. This consolidation helps in reducing both fraud occurrences and operational expenses while improving the customer’s trust journey.

Put together, Udentify, aiReflex, and fcase form a comprehensive, frictionless, and resourceful suite of solutions for a robust CDD strategy in this digital era.