Customer Due Diligence (CDD)

Customer due diligence measures are used to identify financial crimes, such as money laundering, tax evasion, corruption, and terrorism financing. 

Other key roles of CDD include:

• Helping regulated entities meet legal requirements and comply with AML regulations.
• Protecting businesses from being used to launder funds and conceal illicit cash.
• Identifying and reporting suspicious activity to disrupt illicit networks.

The type of due diligence depends on the customer’s risk profile and their KYC risk assessment results. 

In general, there are three levels:

1. Simplified due diligence (since it’s the lowest level of due diligence, SDD consists of less intensive methods to gather customer information).
2. Standard customer due diligence (ID verification and AML screening measures).
3. Enhanced due diligence (conducting extra verification processes, such as a source of funds check).

The Bank Secrecy Act (BSA), established in 1970, is a key US regulation designed to combat money laundering, mandating the implementation of CDD processes as a way to combat financial crime. 

Developed by the Financial Crimes Enforcement Network (FinCEN), the BSA requires institutions to:

• Identify and monitor potential money laundering activities.
• File reports of cash transactions above $10,000.
• Report suspicious transactions for investigation and prosecution.
• Deploy in-depth risk assessment (follow CDD to establish risk profiles and monitor high-risk accounts and transactions).

Customer due diligence doesn’t end at the onboarding stage. Risk profiles change, and customers who have shown good behavior in the past can develop criminal intentions. For this reason, companies should conduct ongoing due diligence and regularly monitor their AML programs to keep up with changing AML requirements. This helps spot changes in user activities and transactions, for example, if they developed a Politically Exposed Person (PEP) status or have been included in a sanctions list. 

The CDD Final Rule amends the Bank Secrecy Act (BSA) to strengthen AML/CFT compliance efforts. It expands existing CDD obligations to prevent criminals and terrorists from using companies to hide illegal funds. So, regulated entities must focus not only on KYC but also on Know Your Business (KYB) measures to identify risks linked to establishing business relationships with other companies. 

The CDD Final Rule aims to enhance financial transparency and detect criminals who exploit companies for concealing money laundering by: 

• Establishing and verifying customer identities.
• Establishing and verifying company beneficial ownership.
• Understanding the nature and purpose of customer relationships and documenting risk assessments to build customer risk profiles.
• Conducting ongoing monitoring to detect and report suspicious activity while keeping all customer data up-to-date.

KYC, or Know Your Customer, involves verifying customer identities to support CDD. It collects and assesses essential information before account opening, helping evaluate risk levels. So, the key difference between KYC and CDD lies in timing. KYC occurs at the start of a business relationship to screen potential customers, while CDD involves ongoing monitoring for suspicious activities. Both measures are essential to a company’s AML program.