During the process of onboarding customers, the first step is to check the legitimacy of customers’ data and identity. The customer could be an individual or a company. This process of verification is called Customer Due Diligence (CDD). 

Failure to conduct CDD will expose the business at a higher risk of illicit activities such as fraud, money laundering, and even the possibility of not complying with AML regulations. The cost of non-compliance can cost businesses monetary losses and loss of trust amongst stakeholders like customers and investors. 

When and How is CDD conducted? 

CDD is required before businesses enter into a relationship with the customer. The objective of CDD is to assess the customer’s risk profile to ensure that the customer’s identity is not fake. However, the CDD process does not stop there, CDD must be continued throughout the business relationship as the customer’s risk profile may change. 

For instance, in circumstances where the business notices that the customer is performing occasional transactions which involve high amounts of money, the business should proceed to implement CDD checks to handle any sudden risk. 

CDD is crucial to help the business mitigate the potential risk that they may face. In low risk situations, the compliance officers can opt to perform a simplified check, known as Simplified Due Diligence (SDD). If SDD is insufficient for higher risk situations, then an Enhanced Due Diligence (EDD) would need to be conducted instead. 

The 3 Steps in CDD:

  1. Verification of customer
  2. Deciding on whether to use SDD or EDD
  3. Ongoing Monitoring

Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD)

SDD allows businesses to reduce the time of the CDD process, which means that the extent of verification would not be as thorough. Nonetheless, this does not mean that the SDD forgoes any necessary and essential CDD steps. 

When compliance officers review and believe that the customers’ behaviour poses a higher risk of financial crime, the EDD may be triggered. For example, in certain situations like  customers who are under the Politically Exposed Persons (PEPs) list, from high-risk countries, or carry out high transaction amounts. 

The EDD is an extension of SDD which consists of additional checks. The organisation will require additional documents for verification of identification of the customer, closer monitoring of the purpose of the transactions, and conducting ongoing monitoring. When designing the EDD policies and procedures, they should be dependent and personalised based on the organisation’s business nature. These procedures and policies in EDD will help strengthen the AML compliance process. 

Learn how the Regtank Compliance Solution can help you and your business take preemptive measures to build a robust AML protocol and reduce the risk of frauds. 

Contact us at info@regtank.com for a demo!