What is Customer Due Diligence (CDD)?

Customer Due Diligence (CDD) is an essential step for financial institutions for effective financial crime prevention.

But what does Customer Due Diligence imply, and how can it help you improve your AML work?

In this article, we'll explain what Customer Due Diligence is, why financial institutions need to conduct effective onboarding and CDD, and how Trapets can help you improve your CDD process.

What is CDD (Customer Due Diligence)?

Customer Due Diligence (CDD) is a key process that financial institutions use to collect relevant information about a customer or potential customer and evaluate their risk level.

The main purpose of conducting CDD is to assess the customer's risk associated with money laundering and terrorist financing.

By executing thorough due diligence on customers, you can ensure that your financial institution or organisation isn't inadvertently involving itself in facilitating illegal activities.

Why is Customer Due Diligence (CDD) important?

As a financial institution, you can't overstate the importance of effective CDD in your work against financial crime. CDD is a crucial step along with the know-your-customer process (KYC), and it serves several purposes:

• Risk management: knowing and assessing the risks associated with each customer helps you implement appropriate measures to mitigate them.
• Regulatory compliance: CDD is a legal requirement in many jurisdictions, meaning non-compliance can result in severe penalties, fines, and reputational damage.
• Financial crime: implementing effective CDD helps your company prevent money laundering and terrorist financing by not becoming unwitting accomplices with the wrong customers
• Building trust: CDD is not only about regulatory compliance; it also helps you build trust with customers and stakeholders by showing your commitment to ethical practices.

Different types of Customer Due Diligence (CDD)

Customer Due Diligence is not just a one-time process; it involves continuous steps and measures throughout the entire relationship with your customer, reflecting the ongoing commitment and vigilance required in risk management.

Generally, there are three main types of Customer Due Diligence:

1. Standard customer due diligence: 
   This is the basic level of due diligence you need to conduct on all customers. This first step involved verifying the customer's identity and assessing the general risk they pose for your company.
2. Enhanced due diligence: 
   If a customer poses a higher risk, such as politically exposed persons (PEPs) or those from high-risk countries, you must continue with enhanced due diligence. This step involves more detailed scrutiny and additional information gathering beyond standard requirements.
3. Ongoing due diligence:
   As mentioned previously, CDD is not a one-time process. All your customers, especially those posing a higher risk, need to be continuously monitored to detect any unusual or suspicious behaviour.

What information to collect for effective CDD?

To conduct effective Customer Due Diligence, you'll need various amounts of information directly from the customer, as well as from external sources and other verification services. The key information for CDD contains:

• Customer information:
  • full legal name and any aliases
  • address and contact details
  • date of birth and identification details (such as passport or national ID)
• Business information:
  • nature of the business and its structure
  • ultimate beneficial owners and their identities
  • purpose of the business relationship or transaction
• Financial information:
  • source of funds and wealth
  • transaction patterns and expected account activity
• Risk information:
  • geographical risk, for instance, if the customer comes from a high-risk country
  • customer risk, if the customer is a politically exposed person (PEP)
  • product/service risk, if there are any high.value transactions

Much of this information can be obtained directly from the customer, but it's also important to check other relevant external resources, such as:

• Official documents, such as passports, IDs, bank and financial statements, and business registration documents
• Public data and registries, such as company registries, sanction lists, adverse media, and politically exposed persons (PEP) databases
• Third-party verification services, such as financial information providers and CDD and KYC providers
• Internal records, such as previous transactions and relationships with the customers, as well as internal risk assessments and customer profiles

How Does CDD differ from KYC?

While Customer Due Diligence (CDD) and Know Your Customer (KYC) are essential steps in your anti-money laundering work, each plays a different role in the long fight against financial crime.

KYC focuses mainly on identifying the identity of your customers at the initial stages of the business relationship. This step involves collecting and validating general information about your customers and ensuring they are who they claim to be.

CDD can also focus on collecting customer information, but it goes further into assessing the risk level associated with the customer and monitoring their activities throughout the entire business relationship.

How Trapets helps you in your CDD process

To grow your business, it's crucial to onboard your customers quickly and smoothly while safeguarding it against money laundering risks.

This is why you need to conduct secure and thorough customer due diligence (CDD) checks. We understand that these checks can be time-consuming and costly.

Trapets Customer Due Diligence allows you to onboard customers accurately and securely without sacrificing speed or quality.

Our solution helps you understand your customers from the beginning and throughout their lifecycle with your business. You can create, send, and manage KYC and KYB questionnaires in one place to onboard customers in seconds. Fight financial crime with a flexible customer onboarding and due diligence solution.

In conclusion

Customer Due Diligence is a vital process for financial institutions against money laundering, helping them manage risk, comply with regulations, and prevent financial crime.

By understanding the importance of CDD and implementing advanced solutions like Trapets Customer Due Diligence, you can enhance your AML efforts and build a more secure financial environment.