{"id":665,"date":"2021-02-03T18:26:00","date_gmt":"2021-02-03T18:26:00","guid":{"rendered":"http:\/\/new.complycube.io\/what-is-customer-due-diligence\/"},"modified":"2026-04-08T16:15:09","modified_gmt":"2026-04-08T16:15:09","slug":"what-is-customer-due-diligence","status":"publish","type":"post","link":"https:\/\/www.complycube.com\/en\/what-is-customer-due-diligence\/","title":{"rendered":"What is Customer Due Diligence (CDD)?"},"content":{"rendered":"
\n

TL;DR:<\/strong> Customer Due Diligence is a key aspect of the Know Your Customer (KYC)<\/strong> process. It aims to mitigate risks in business relationships, prevent financial crime, and ensure regulatory compliance. This guide will explain what is Customer Due Diligence (CDD)<\/strong>, the common challenges involved, and how to achieve full KYC compliance through effective CDD checks.<\/p>\n<\/div>\n\n\n

What is Customer Due Diligence?<\/h2>\n\n\n\n

Customer due diligence is the process by which companies, particularly financial institutions and other regulated entities<\/a>, collect and analyze customer information to ensure compliance with legal and regulatory requirements. Customer due diligence involves conducting manual or automated checks to verify customer identities and understand the nature of their financial history in line with the potential risks a customer presents.<\/p>\n\n\n\n

The US Federal Financial Institutions Examination Council<\/a> (FFIEC) recommends that a robust Anti-money Laundering (AML) compliance program adopt thorough CDD measures, especially for high-risk customers.<\/p>\n\n\n\n

The Three Levels of Customer Due Diligence<\/h2>\n\n\n\n

Companies commonly adopt three nuanced levels of customer due diligence, each aligned to the customer’s risk profile. This strategy aligns with the Risk-Based Approach (RBA), as recommended by the Financial Action Task Force (FATF)<\/a>.<\/p>\n\n\n\n

By adopting these varying levels of due diligence, a financial institution can ensure an effective risk management strategy, enabling it to respond swiftly to diverse customer risk scenarios. You can learn more here: What is a Risk-Based Approach (RBA)?<\/a><\/p>\n\n\n\n

\"What<\/figure>\n\n\n\n

Simplified Due Diligence (SDD)<\/h3>\n\n\n\n

Simplified due diligence applies when there is a low risk of involvement in financing terrorism or money laundering. SDD involves lighter KYC<\/a> procedures with low identity assurance requirements. Nonetheless, businesses may run enhanced due diligence on low-risk customers to better assess customer relationships and improve trust.<\/p>\n\n\n\n

Basic Due Diligence (BDD)<\/h3>\n\n\n\n

BDD is also referred to as standard due diligence or basic customer due diligence. It is the most common level of CDD and involves customer identification and data verification. Businesses use a government-issued ID, trusted third-party databases, and private data sources to check customer details. BDD also requires businesses to confirm a customer\u2019s activities, source of funds, business model, and ultimate beneficial ownership.<\/p>\n\n\n\n

\"Ultimate<\/figure>\n\n\n\n

Enhanced Due Diligence (EDD)<\/h3>\n\n\n\n

High-risk customers, such as Politically Exposed Persons (PEPs) or clients from high-risk countries, must undergo enhanced due diligence. EDD involves gathering additional identity information and establishing the sources of wealth or funds. Understanding the intended business relationship and the purpose of potential customer transactions is also essential.<\/p>\n\n\n\n

\"EDD<\/figure>\n\n\n\n

Several jurisdictions have enacted laws mandating that financial institutions establish EDD measures. Examples include the European Union’s 6th Anti-Money Laundering Directive (6AMLD<\/a>) and the Bank Secrecy Act (BSA<\/a>) in the United States. You can learn more here: Navigating the World of Enhanced Due Diligence<\/a>.<\/p>\n\n\n\n

Case Study: ESG Compliance<\/h3>\n\n\n\n

Historically, Environmental, Social, and Governance (ESG) factors weren’t considered compliance issues. However, new mandates<\/a> from bodies such as the Securities and Exchange Commission (SEC) highlight the changing nature of regulations, leading to the need for ongoing monitoring procedures.<\/p>\n\n\n\n

For instance, in 2022, the SEC fined<\/a> Goldman Sachs Asset Management $4 million for not adhering to its ESG guidelines. Therefore, when considering partnerships, it is vital to conduct a thorough risk assessment to avoid reputational risk and foster responsible business relationships.<\/p>\n\n\n\n

When is Customer Due Diligence Required?<\/h2>\n\n\n\n

The need for CDD checks emerge at different stages, whether at the beginning of a business relationship, during transactions of significant value, or in scenarios that require higher scrutiny due to emerging concerns. The following are instances when a CDD process is needed:<\/p>\n\n\n\n

    \n
  1. New Business Relationship:<\/strong>\u00a0Businesses collect relevant information at onboarding to verify that customers are who they claim to be and to prevent identity fraud.<\/li>\n\n\n\n
  2. Occasional Transactions: <\/strong>CDD assessments are warranted for financial transactions exceeding regulatory thresholds or which involve companies or individuals from a high-risk country.<\/li>\n\n\n\n
  3. Suspicion of Money Laundering:<\/strong> Suspicious activity from a returning or new customer might hint at involvement in terrorist financing or money laundering.<\/li>\n\n\n\n
  4. Unreliable or Fake Documentation<\/strong>: Businesses apply additional identification measures to resolve discrepancies when a customer provides inadequate identification documents.<\/li>\n\n\n\n
  5. Ongoing Monitoring:<\/strong> CDD is an ongoing process that involves monitoring business relationships to ensure they align with customer risk profiles.<\/li>\n<\/ol>\n\n\n\n
    \"When<\/figure>\n\n\n\n

    The Customer Due Diligence Rule Requirements<\/h2>\n\n\n\n

    The FATF recommends several requirements for a reliable customer due diligence process as part of Recommendation 10:<\/p>\n\n\n\n