Customer Due Diligence: Verifying Trust in Finance

Customer Due Diligence (CDD) is a regulatory mandated process organisations perform to verify their customer’s identity, assess associated risks, and ensure compliance with anti-money laundering (AML) regulations. This process is rooted in Know Your Customer (KYC) practices and encompasses various checks, such as verification of identification documents, risk profiling, and transaction monitoring.

The four key requirements of customer due diligence include verifying customer identity, identifying beneficial ownership of accounts, understanding and assessing customer activities to determine risks, and conducting ongoing monitoring to detect suspicious transactions. These efforts ensure compliance and safety in financial dealings while preventing adhesion to illicit activities.

Customer due diligence is vital in banking as it safeguards against financial crimes such as money laundering, fraud, and terrorism financing. By properly screening and monitoring customers, banks can protect their reputation, comply with regulatory frameworks, and mitigate risks related to financial malpractice.

The purpose of customer due diligence is to ensure that organisations conduct sufficient checks to verify the identity of their customers and assess potential risks. This enables early detection of financial threats, shields against reputational damage, and ensures adherence to regulations like AML and counter-terrorism financing laws.

CDD should be performed during customer onboarding, initiation of new account relationships, when occasional transactions exceed certain thresholds, and if suspicious activity is detected during regular operations. Ongoing customer monitoring is equally important to identify risks as customer profiles or activities evolve.

CDD is a subset of Know Your Customer (KYC), focusing specifically on verifying customer identity, assessing risk, and monitoring transactions. KYC encompasses a broader compliance framework that includes processes like customer onboarding, ongoing monitoring, and enhanced due diligence (EDD) for high-risk entities.

The Financial Crimes Enforcement Network (FinCEN) CDD rule is a US regulation implemented in 2018 that focuses on the verification of customer identities, beneficial ownership of business accounts, understanding the nature of customer relationships, and ongoing monitoring.

Documents required for CDD include government-issued identity proofs like passports or driver’s licences for individuals, and registration certificates, tax IDs, or business licences for entities. For verifying beneficial ownership, documents such as shareholder registers or declarations are essential.

CDD can be categorised into three types: Simplified Due Diligence (SDD) for low-risk customers requiring minimal verification, Standard CDD for routine checks of regular customers, and Enhanced Due Diligence (EDD) for high-risk entities like politically exposed persons (PEPs).

Ongoing customer due diligence (CDD) involves the regular review and monitoring of customers’ activities and profiles to identify any changes that may suggest increased risk or unusual behaviour. The process ensures organisations remain compliant with regulatory requirements by keeping customer data and associated risk assessments up to date. Using automation, such as advanced algorithms, can support dynamic and continuous screening processes, enabling more efficient detection of anomalies.

While CDD includes standard verification and risk assessment, Enhanced Due Diligence (EDD) applies stricter scrutiny for customers deemed high risk. EDD involves additional steps, such as in-depth background checks, frequent monitoring, and verification of adverse media links.

CDD under AML compliance ensures that financial systems are not misused for laundering money or financing illegal activities. This is achieved through stringent verification of identities, risk profiling, and continuous monitoring to detect and report suspicious transactions.

Banks implement customer due diligence (CDD) by following systematic procedures to ensure compliance with regulatory requirements and mitigate risks. This includes collecting and verifying customer identities, analysing the nature and purpose of their financial activities, and continuously monitoring for any changes in behaviour that may indicate elevated risk. Tools and automated processes often assist in streamlining these workflows, improving efficiency and accuracy in customer screening.

Failure to perform CDD can lead to regulatory fines, reputational damage, and elevated risks of financial crime. Non-compliance can also result in legal penalties or operational disruptions, such as account closures and restricted access to international financial networks.

The challenges in CDD include managing false positives, navigating complex global regulations, and balancing compliance obligations with customer experience. Adopting advanced technology like digital onboarding and AI-based screening can help address these issues effectively.