Customer Due Diligence - what is it and how does it work?

Knowing your customers is a fundamental principle in the financial sector. Customer due diligence (CDD) is a process that ensures businesses have sufficient information about their customers to identify risks related to money laundering, fraud, and other financial crimes. 

By collecting and analysing customer data, businesses can make informed decisions and comply with regulatory requirements governing financial transactions.

In this article, we will explain what customer due diligence entails, why it is important, and how the process works in practice.

What is Customer Due Diligence (CDD)?

Customer Due Diligence is the process in which businesses collect and verify information about their customers to assess potential risks. The goal is to ensure that the customer is who they claim to be and that their financial activities do not pose a risk for money laundering or terrorist financing.

Depending on the customer’s risk profile, the CDD process can be more or less extensive. In some cases, basic identification is sufficient, while high-risk customers require a more detailed review, known as enhanced due diligence (EDD).

CDD for banks

Banks and other financial institutions are required to conduct CDD on their customers. This process begins at the customer's first interaction with the bank and continues throughout the business relationship. Key aspects of CDD for banks include:

• Identity verification – The bank must confirm the customer's identity through identification documents and other verification methods.
• Risk assessment – Customers are categorised based on risk level, depending on their business activities, transaction patterns, and geographic links.
• Ongoing monitoring – Banks must continuously review customer activities to detect any suspicious behaviour.

A robust CDD process helps banks detect and prevent financial crimes while creating a safer business environment for all parties.

Customer due diligence requirements

CDD regulations vary across jurisdictions, but some fundamental requirements apply universally:

• Customer identification (or KYC – Know Your Customer) – Businesses must collect the customer’s name, date of birth, address, and other relevant information.
• Understanding the customer’s business – Companies need to have sufficient knowledge of how the customer uses their services to detect anomalies.
• Transaction monitoring – All financial transactions must be reviewed to detect potentially suspicious activities.
• Documentation and reporting – Information about customers and their transactions must be securely recorded and stored.