Customer Due Diligence (CDD)

The Customer Due Diligence (CDD) Rule is a regulation issued by the Financial Crimes Enforcement Network (FinCEN) aimed at improving financial transparency and preventing financial crimes and money laundering.

According to FinCEN, the CDD rule requires covered financial institutions to “identify and verify the identity the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts.” Beneficial owners include any individual who owns 25 percent or more of a legal entity.

To do this, organizations must “establish and maintain written policies and procedures that are reasonably designed to (1) identify and verify the identity of customers; (2) identify and verify the identity of the beneficial owners of companies opening accounts; (3) understand the nature and purpose of customer relationships to develop customer risk profiles; and (4) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.”

Frequently asked questions

What are the 3 levels of customer due diligence?

There are three levels of customer due diligence (CDD): simplified due diligence, standard (or basic) due diligence, and enhanced due diligence.

  • Simplified due diligence: Simplified due diligence processes are applied to low-risk transactions or customers with known and reliable fund sources. While identity verification is still required, simplified frameworks streamline the process by requiring fewer in-depth checks.
  • Standard due diligence: Standard due diligence requires companies to collect and verify basic customer information to decrease risk.
  • Enhanced due diligence: Enhanced due diligence is applied to high-risk transactions and individuals. This may include high-value transactions or individuals from countries with high volumes of money laundering. Enhanced checks often ask for additional identity documentation or verification of asset sources before transactions are approved.

What is the difference between KYC and CDD?

Know your customer (KYC) and customer due diligence (CDD) are closely related, as they both involve identity verification. However, while KYC checks can sometimes be limited to the beginning of the customer transaction or account creation process, CDD explicitly requires continuous transaction monitoring.

What is a CDD check?

A customer due diligence (CDD) check is the process of confirming that customers are who they say they are through identity verification and examining transaction records and wealth sources. CDD checks may occur at any time during the transaction process.

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