What is a CDD Check?

A Customer Due Diligence (CDD) check is a process conducted by financial institutions and regulated entities to identify and verify a customer’s identity, establish their financial risk profile, and ensure ongoing compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.

Purpose of a CDD check

The primary purpose of a CDD check is to ensure that the client’s identity and business activities are legitimate and comply with legal and regulatory standards. Due diligence helps institutions proactively identify, assess, and manage risks associated with each client, providing valuable insights for monitoring transactions and determining the level of scrutiny needed in future interactions. By maintaining a thorough and ongoing review of customer information, CDD serves as a critical defence against money laundering, terrorism financing, and other forms of financial corruption.

Key elements

Customer identification

To establish a client’s identity, firms collect and verify key personal information, including full name, government-issued photo ID, residential address, occupation, and tax identification number. This process can be conducted either manually or through digital identity verification solutions, such as online ID checks.

Ultimate beneficial owner (UBO) identification

For corporate clients, it is essential to identify individuals who hold significant stakes in the company and benefit from its activities. Firms have to go over company records, public registries, and other legal filings to determine a company’s UBOs.

Risk assessment

The customer’s risk profile is assessed and classified as low, medium, or high based on multiple factors, such as background, business nature and activities, and location. For example, an offshore investment firm whose UBO is a politically exposed person (PEP) would be a high-risk client. Based on the status, appropriate CDD measures are employed — simplified, standard, or enhanced.

Ongoing monitoring

Regularly screening client activities and transactions, especially those of high-risk customers, ensures timely detection of suspicious or abnormal patterns. Firms can then determine the necessary course of action, such as reporting to the relevant Financial Intelligence Unit (FIU).

When is it required?

A CDD check should be performed in the following situations:

Onboarding: Before starting a business relationship, a CDD check is mandatory to assess the customer and establish their risk profile.
High-value transactions: CDD checks are necessary for monitoring large financial transactions, identifying the parties involved, and verifying the legitimacy of funds.
Suspicious activity: If a customer’s activity raises red flags (such as unusual transaction patterns), additional CDD checks are conducted to assess the nature of the transactions and mitigate associated risks.
Regularly for high-risk entities: For clients deemed high-risk, periodic CDD checks help ensure ongoing compliance and provide early detection of potential risks.

Who do you perform a CDD check on

A CDD check can be performed on the following entities:

Individuals: CDD checks are performed on individual client accounts to verify their identity and assess risk status.
Businesses: For corporate clients, CDD checks include assessing the company’s nature and purpose, verifying its legitimacy, and identifying ownership structure.
PEPs: Individuals with high public profiles or political exposure are subject to enhanced due diligence (EDD) measures due to their influence and higher potential for corruption or financial crimes.

Requirements on firms making CDD checks

Regulations mandate that firms conducting CDD checks follow AML and CTF guidelines. The requirements include:

Identifying and verifying the identities of customers and UBOs.
Ensure that electronic identification processes used for CDD verification are independent and secure.
Understanding the purpose and nature of the customer relationship before doing business.
Collecting sufficient information to assess risks associated with the business relationship.
Obtaining proof of company registration before establishing relationships with certain legal entities.
Regularly monitoring transactions and interactions with existing customers for risk assessment updates and to ensure consistency with known information.
Performing EDD checks in high-risk situations or when CDD cannot be applied.
Documenting efforts to identify UBOs, especially for complex corporate structures, and maintaining records when beneficial ownership cannot be determined satisfactorily.
Report discrepancies to relevant bodies.

*Disclaimer: This content does not constitute legal advice. The suitability, enforceability or admissibility of electronic documents will likely depend on many factors such as the country or state where you operate, the country or state where the electronic document will be distributed as well as the type of electronic document involved. Appropriate legal counsel should be consulted to analyze any potential legal implications and questions related to the use of electronic documents.