Customer due diligence explained

June 1, 2021

Customer due diligence explained

Customer due diligence, or CDD, is the process of verifying customers’ identities and assessing their financial situations to understand their potential risk of involvement with financing crimes. The customer due diligence rule, also known as the CDD Final Rule, declared that a comprehensive set of risk-based customer due diligence policies are a pillar of a strong BSA/AML compliance program. Anti money laundering customer due diligence is one of the first roadblocks to financial crimes.

How customer due diligence works

The first step in customer due diligence is to obtain a customer’s information. Banks will collect and verify a customer’s full name, residential address, phone number and email address, date of birth, signature and other standard information.

The customer’s information should then be verified through reliable, independent sources. Banks will also assess each customer’s risk level. No two customers have the same financial circumstances and risks. Some require different levels of customer due diligence. There are a few types of CDD:

·       Standard customer due diligence

·       Simplified customer due diligence

·       Enhanced customer due diligence

·       Ongoing customer due diligence

Standard customer due diligence

For most financial institutions, standard customer due diligence is sufficient for the majority of customers. In standard customer due diligence, a customer’s identity is verified from a reliable source. Financial institutions will also determine the nature of the customer’s transaction or business needs and obtain more information where necessary to determine if further due diligence is required.

Simplified customer due diligence

When a customer has a very low risk of involvement with money laundering or terrorism financing, simplified due diligence can be used. For this method, financial institutions need only to identify the customer. The customer’s identity does not need verification.

Enhanced customer due diligence

For customers who have high risk of involvement with money laundering or terrorism financing, enhanced customer due diligence is  who are at higher risk include politically exposed persons. With enhanced CDD, additional steps are taken to verify the customer’s information and address their situation. Potential additional steps include further identification, information on a customer’s source of funds, the purpose of the transaction and ongoing monitoring.

Ongoing customer due diligence

Because a customer’s financial situation or personal circumstances can change rapidly, it’s important that financial institutions continually monitor their customers to be aware of changes that may require enhanced due diligence. This ongoing customer due diligence should continue until business with the customer ceases.

How to conduct customer due diligence

While customer due diligence can be performed manually, it’s recommended that financial institutions use software to conduct screenings. Manual screenings are costly, time consuming and leave more room for human error. Customer due diligence software can help make AML due diligence and customer due diligence faster, easier and more accurate. Moody’s Analytics delivers smarter customer due diligence screening solutions with the world’s largest open source risk-relevant database. Learn how we can help enhance your business’s customer due diligence program and protect your business from financial crimes.

If you have any questions about MA’s solutions or would like to discuss KYC for your business, get in touch via our contact form.

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