Customer Due Diligence (CDD) refers to regulations that help financial institutions avoid doing business with high-risk individuals and entities.

What does CDD involve?

The CDD process involves performing a risk assessment and creating a risk profile of the potential customer. This risk-based approach helps firms avoid participating in financial crime. For example, it helps stop money laundering, which supports human trafficking and terrorist financing. It also prevents firms from doing business with politically exposed persons (PEPs).

According to FinCEN, the CDD Rule includes the following steps:

  1. Identify and verify the identity of customers
  2. Identify and verify the identity of the beneficial owners of companies opening accounts
  3. Understand the nature and purpose of customer relationships to develop customer risk profiles
  4. Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

When do firms perform CDD?

Customer due diligence is required when the customer and firm first initiate a business relationship. Firms also perform ongoing monitoring of their existing customers.

Furthermore, if a customer moves into a higher risk category, the firm performs enhanced due diligence (EDD). This process involves deeper analysis to determine whether the customer’s risk has changed.

Firms typically review the customer relationship in response to the following events:

  • Significant and unexplained changes in account activity
  • Changes in employment or business operation
  • Changes in ownership of a business entity
  • Red flags identified through suspicious activity monitoring
  • Receipt of law enforcement inquiries and requests
  • Results of negative media search programs
  • Length of time since the firm gathered customer information and assessed the customer risk profile

What about KYC?

Customer Due Diligence and Know Your Customer (KYC) are closely related concepts. Beam provides a KYC/CDD solution that enables businesses to create a full digital identity of their customers. Request a demo to see how Beam will transform compliance in your organization.