Customer Due Diligence - what is it and how does it work?
In this article, we will explain what customer due diligence (CDD) entails, why it is important, and how the process works in practice.
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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.
CDD
Know your customers from the start
A well-executed CDD process reduces the risk of financial crime and protects businesses from legal and financial consequences. Streamline your CDD process with Trapets’ solutions – see how we can help you.
Risk-based customer due diligence assessment
Not all customers pose the same level of risk, which is why a risk-based approach is used to determine the depth of the CDD process. This approach involves assessing each customer individually based on factors such as:
- Geographic risk – Customers from high-risk countries may require enhanced scrutiny.
- Transaction patterns – Large or unusual transactions may indicate higher risk.
- Industry-specific risks – Certain industries, such as cash-intensive businesses or cryptocurrencies, have higher risk levels.
- Politically exposed persons (PEP) – Customers with political ties undergo extra scrutiny due to the risk of corruption.
A risk-based approach allows businesses to allocate resources where they are most needed and ensure effective regulatory compliance.
Customer due diligence process
The CDD process typically follows a structured approach to ensure all necessary checks are performed:
- Customer data collection – Basic information about the customer is gathered and verified.
- Identity verification – ID documents and other records are reviewed for authenticity.
- Risk assessment – The customer is assigned a risk profile based on their background and transaction patterns.
- Ongoing monitoring and updates – The customer’s activities are continuously monitored to detect changes that may require further action.
- Reporting suspicious activity – Any anomalies are reported in accordance with regulatory requirements.
Frequently asked questions about customer due diligence (CDD)
No, but companies in the financial sector and other regulated industries must follow CDD requirements under applicable laws.
KYC (Know Your Customer) is a part of the CDD process that focuses on customer identity verification, whereas CDD also includes risk assessment and ongoing monitoring.
EDD is required when a customer poses a higher risk, such as being a PEP or having ties to high-risk countries.
This varies by jurisdiction, but generally, data must be stored for at least five years after the customer relationship ends.
Non-compliance can result in hefty fines, legal action, and reputational damage.
In conclusion
Customer due diligence is a crucial component in maintaining a secure and regulated financial environment. By having a clear and effective process, businesses can minimise risks and contribute to a more transparent and responsible business climate.
Complying with CDD requirements is not just about avoiding legal consequences—it is also essential for building trust and protecting the financial system from abuse.
With the right tools and strategies, businesses can ensure they stay ahead in the fight against financial crime.