Why Customer Due Diligence (CDD) is important to businesses that are subject to AML regulations

CDD, or Customer Due Diligence, is an important concept to know – especially for businesses that are subject to anti-money laundering laws, regulations, and directives.

Following the EU’s latest money laundering directive (AML 5) which was issued in 2020, there have been a number of changes to money laundering laws in Europe. The biggest change is that businesses were obliged to transition to an anti-money laundering (AML) risk assessment model that demands more of businesses and their ability to correctly assess their customers and client relationships – which is where CDD comes into the picture.

In this article we comprehensively explain what CDD is – and answer the most frequently asked questions about the subject.

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What is CDD?

CDD is an acronym for ‘Customer Due Diligence’.

The term applies to all procedures that a business uses to verify the identity of their customers or clients, as well as assess their background information and risk level. A number of these activities need to be completed before the potential client actually signs a legal contract and becomes a client.

Both individuals and other businesses can be subject to a CDD investigation.

Why is CDD important?

There are quite a few good reasons for businesses to have proper CDD procedures and checklists in place when you need to assess potential clients:

business secure

To protect your business against potential risks.

choice

To make the best possible decisions as a business.

compliance

To comply with current laws and regulations.

identity thief

To guard the business against deception and malpractice, such as identity theft.

unusual behavior

To help the business identify unusual behavior with the business’ clients.

For these reasons, a procedure regarding CDD is a necessary tool for many businesses, in particular businesses subject to anti-money laundering laws and regulations.

Read more about the danish Anti-Money Laundering Directive (Hvidvaskloven).

Customer Due Diligence checklist

CDD data consists of information regarding a customer or client that makes it possible to assess to what extent the client might put the business at risk of being misused for money laundering or the financing of terrorism.

This data can – among other things – consist of:

1. The client’s identity

Names, photos, addresses, and birth certificates can all be used to identify a client.

2. Background check

A part of the initial CDD also pertains to PEP screenings that assess whether the client is a so-called PEP (Politically Exposed Person). This could, for example, be to investigate whether the client has or is involved in scandals or other troubling activities (information that is typically publicly available). This is called Adverse Media Screening.

3. Ownership

If your client is a company or organization, it’s important to ascertain ownership of the businesses: who owns the business? If ownership is shared, who owns how many shares of the business?

4. Customer relationship

It’s equally important to understand and get an overview of the professional relation between you and your potential client. How is this relation? What is the purpose of the partnership?

Enhanced Due Diligence (EDD) for high-risk clients

Certain clients – for example, PEPs – have a higher risk profile than others. In these cases, it’s important to implement procedures defined as Enhanced Due Diligence (EDD).

With EDD you investigate the potential client’s:

Legal matters

Has the person or business previously been convicted, or involved in a crime? Are there any contractual relations that need to be accounted for?

Finances and taxes

How are their financial statements? Are there any obvious tell-tale signs of illegal activities?

Shares

Does everything add up when it comes to the person’s/business’ physical shares and commodities, including offices and production facilities?

On-going control and assessment

You can implement an enhanced, on-going control and surveillance of the client’s business.

CDD in connection with money laundering

CDD procedures are invaluable for businesses that are subject to Anti-Money Laundering (AML) laws and regulations, as they’re necessary to conduct the individual clients’ risk assessments.

In many cases there is a need for both CDD and KYC (Know Your Customer) information in order to get a proper overview of the client’s risk profile and simultaneously verify their identity". The business’ KYC procedure describes what tasks are necessary to perform before the business can credibly say that they know their client.

For example, CDD and KYC procedures are necessary for:

new customer

1. New clients

Before a potential new client becomes an actual client, their identity needs to be verified and undergo a risk assessment.

money world

2. Single transactions

Businesses in the financial sector as well as banks are required to investigate and evaluate whether clients are demonstrating suspicious behavior. This could for example be when making a substantial transaction or when dealing with high-risk countries.

money laundry

3. Suspicion of money laundering

A through background check of the client is also necessary if you have a suspicion that they might be involved in criminal activities, such as money laundering.

paper

4. Faulty or lacking documentation

If a client is unable to provide valid or approved identity documents then the business needs to perform a CDD check.

Streamline your CDD procedure with NewBanking Identity

NewBanking Identity is a software platform developed to handle information and data about your clients in a secure and centralized fashion.

With NewBanking Identity you get:

A safe and automated onboarding

You can define and obtain the required information from your clients – directly in the platform.

A comprehensive overview

All relevant information about your clients are stored in one easy-to-use platform. It gives you a grand overview and ensures that you’re compliant with GDPR. You can also tag clients for easy organization.

Automated processes

With NewBanking Identity it’s possible to integrate processes that automatically screens your clients against PEP lists.

Curious?

Do you want to know more about NewBanking Identity?

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