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Customer Due Diligence

Customer due diligence (CDD) is a process used at financial institutions (FIs) when working with potential new customers.

CDD ensures that financial institutions have carefully considered the risk of working with a given customer before allowing that customer to open an account. FIs must use Enhanced Due Diligence procedures for customers who pose a higher risk.

History of Customer Due Diligence

The CDD rule is an amendment to the Bank Secrecy Act—legislation aimed at detecting and preventing money laundering.  As such, CDD is designed to enhance financial transparency and stop bad actors and/or terrorists from using financial institutions to hide their illegal activities and conceal the origins of their money,

CDD requirements were put into practice on May 11, 2016, and companies were given until May 11, 2018, to comply.

This rule lays out these institutions’ specific obligations to understand the business interests of potential customers and to verify that potential customers aren't involved in criminal activities, like financing terrorism or laundering money.

How Does Customer Due Diligence Work?

CDD is an integral part of the Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance initiatives and aims to help FIs prevent a slew of financial crimes, including money laundering, fraud, financing terrorists, and drug and human trafficking.

The purpose of CDD is to help banks understand their relationships with their customers. Increased knowledge about each customer’s usual transaction types helps these institutions identify potentially suspicious transactions. FIs that don't have the right due diligence processes in place potentially face cyber threats, massive fines for CDD non-compliance, and damage to their reputations.

Guidelines from the Financial Action Task Force note that banks should follow a risk-based approach to CDD. This allows them to balance their budgets and resource requirements with their compliance requirements. It also helps them offer better customer experiences, especially for low-risk consumers.

CDD has four core requirements:

1. Identifying customers: To ensure consumers are who they say they are, financial institutions must establish the identities of potential customers. At this stage, banks collect and verify customers' information, including their full names, addresses, email addresses, phone numbers, occupations, and tax identification or Social Security numbers.

2. Business information: Banks must also collect additional information about the business interests of consumers, including their business models, sources of funds, and beneficial ownership (a beneficial owner is a person who owns or controls more than 25% of an organization's shares or voting rights or who exercises control over the organization or its management).

3. Customer risk assessment: After financial institutions have verified customers' identities, locations, and types of business, they classify those customers by risk levels ( e.g., low, medium, or high). This signifies how likely they are to engage in money laundering and/or other types of fraud. Banks use customers' risk profiles to decide the level of due diligence required for each customer. For example, they will need to do more in-depth due diligence for customers who pose a high risk of engaging in money laundering than they will for low-risk customers.

4. Continuous monitoring: Banks must continually monitor high-risk customers, changing customer profiles, suspicious transactions, etc.

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