Customer Due Diligence

What is Customer Due Diligence?

Customer Due Diligence (CDD) is a process used to gather customer data and evaluate the risk category of the customer. Generally, it is a kind of basic scrutiny about a customer for risk exposure of the business or financial institution.

The information obtained about a customer includes documentation related to the official or legal identity of the individual that establishes proof of identity, address, nationality, date of birth and signature.

What is the relevance of CDD in the KYC process?

As part of the CDD, documents related to Know Your Customer (KYC) are obtained to establish customer identity. The same is further verified as part of KYC onboarding.

Customer identification includes any acceptable document that establishes the customer as a citizen or beneficiary of civic benefits and his proof of address. For entities, acceptable documents include proof of a valid legal presence and the trading address.

Customer verification is the process whereby a customer identity is verified (KYC onboarding), as well as checked against beneficial ownership and sanctions (AML compliance).

Customer identity is verified to ensure that the customer is who he/she claims to be. This is referred to as the KYC onboarding process, where an external service provider or a RegTech company confirms the validity of the documents provided by the customer. Signature proof and additional proofs like self-cheques are some instruments used to verify customer identity.

What are the regulations around CDD?

CDD is a compulsory requirement for all financial institutions and business covered by anti-money laundering regulations that enter into a business relationship with a customer. CDD regulations include KYC onboarding as well as ongoing diligence best practices. It covers within its purview new accounts as well as occasional one-off transactions, such as large amounts beyond specified amounts, or sudden activities in high-risk industries or sectors.

Identification of beneficial owners – an important element of CDD

A “beneficial owner” is any individual who is either of the following:

a) Directly or indirectly owns 25% or more of the equity interests of a legal entity customer,

b) Has significant responsibility to control, manage, or direct the legal entity.

There are written procedures to help identify and verify “beneficial owners”, followed by a mandatory screening compliance. Screening against lists of individuals and entities identified as terrorists, narcotics traffickers, PEPs and database of Sanctions Lists, are part of the CDD compliance.

The advantages of CDD

As expert third-party services are employed, there is less chance of human error involved.  The process of customer onboarding is fast-tracked for KYC and AML compliance, making business processes more resilient and efficient.

A complete customer profile is created with risk scoring, for a business to decide whether to proceed or not with onboarding and registering a customer.