Customer Due Diligence (CDD) Explained

In the world of combating Finance Crime (FinCrime) and Counter-Terrorist Finance (CTF), Customer Due Diligence (CDD) is an important and complex field. In this article, we explore what CDD involves and the challenges facing this crucial anti-crime battleground.

a year ago   •   2 min read

By Estelle Webber
Table of contents

What is Customer Due Diligence (CDD)?

Customer Due Diligence(CDD) is the process used by regulated institutions to collect and evaluate relevant information about their customers. The collected data is used to establish the veracity of customers' identity and assess the level of risk they may pose to their business.

CDD is also an essential component of Know Your Customer (KYC) standards, which vary from country to country or market to market. CDD typically starts by performing a Customer Screening across various official and trusted sources, verifying an official document's authenticity, and building a customer risk profile.

The Three Levels of CDD

Three levels of CDD are standard, simplified, and enhanced:

Standard customer due diligence

This includes identifying the client and ensuring that it is based on an accurate and unbiased source. It is important to ascertain the intent and intended essence of the business relationship or transaction and to obtain more details where appropriate.

Simplified customer due diligence

If a risk assessment has indicated a negligible or low risk of money laundering, this can be extended. Identifying the client is the only prerequisite and there is no need to check the identity of the client.

Enhanced customer due diligence

Where the risk of money laundering is high, such as where the person in question is a politically exposed person (PEP), improved CDD must be applied.

Because of their oversized enforcement departments, many banks fail to streamline their Know Your Customer (KYC) workload and satisfy regulators.

What are the challenges facing CDD?

The challenges of KYC compliance for financial institutions are underlined by these industry studies:

  • In 2020, 47 percent of US banks respond to regulatory enforcement as their key obstacle, as do banks in Europe with 40%. (PwC)
  • File contact times will take between 10 and 25 hours to embed high-risk entities (Oliver Wyman)
  • For ongoing feedback, file contact times are just three hours less than the file touch time for onboarding (Oliver Wyman)

A total of 307 enforcement practitioners at major financial institutions operate on KYC conformity (Thomson Reuters)

Morever, many instituations struggle with the following KYC frictions:

  • Friction 1 – Siloed teams

For instance, KYC teams within banks are frequently siloed and distributed across multiple branches, from customer-facing front-end support to back-end data analysts. This generates a significant disconnect

in the way information is exchanged, allowing KYC data to be out-of-date and reducing the importance of completed KYC profiles, leading to a much longer phase for KYC and KYC refresh completion.

  • Friction 2 – Manual workload

Banks' processing of consumer data also requires a lot of tedious documentation, where unstructured data is intermittent and researchers need to manually access it. For initial KYC checks, this is a massive time drain that is only made worse by data reuse and repetitive testing.

  • Friction 3 – Lack of data quality for continuous monitoring

By having to capture several different data types and coordinate them into siloed teams, can have a major impact on the quality of the data obtained. Missing data causes holes in the profiles of the entity, meaning that the original KYC needs to be conducted over and over again, and the validity of constant KYC tests is poor for these user profiles.

When a full KYC framework for customer onboarding is outlined and improved, this all leads to greater service for both the customer and the bank.

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