Customer Due Diligence (CDD):

Quick Recap
1. Introduction to Customer Due Diligence (CDD)

• De nition & Importance: CDD is a critical process in the nancial sector that involves
verifying the identity of customers and assessing their potential risks related to money
laundering, terrorist nancing, and other nancial crimes.
• Regulatory Framework: CDD is mandated by global AML regulations, including the
FATF Recommendations, EU AML Directives, and local jurisdiction laws.

2. Key Components of CDD

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Customer Identi cation and Veri cation (CIV):

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Collecting personal information (e.g., name, address, date of birth) and verifying through

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reliable documents (e.g., passport, ID card).

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Bene cial Ownership Identi cation:

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Determining individuals who own or control more than 25% of an entity, ensuring

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transparency and preventing misuse.

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Risk Assessment:
Evaluating the risk pro le based on customer type, geographical location, business

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activities, and transaction patterns.
Ongoing Monitoring:
Continuously reviewing customer transactions to identify and report suspicious activities.

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3. Types of CDD

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Simpli ed Due Diligence (SDD):

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For low-risk customers, basic checks are suf cient, such as for regulated entities and
publicly listed companies.

Standard Due Diligence:

Applied to most customers, involving veri cation and risk assessment.

Enhanced Due Diligence (EDD):

For high-risk customers (e.g., PEPs, customers from high-risk jurisdictions), EDD involves
additional veri cation, source of funds checks, and deeper scrutiny.

4. CDD Process: Step-by-Step Guide

Customer Onboarding:
Gather and verify information, establish the customer’s risk pro le.
Risk Pro ling:

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 Assign risk levels (Low, Medium, High) based on factors such as business type, location,
and transaction volume.

Documentation:
Maintain records of all identi cation, veri cation, and due diligence procedures.

Approval & Review:

Compliance team reviews and approves the onboarding based on risk assessment.

Ongoing Monitoring & Review:

Regularly update customer information and monitor for unusual activities.

5. CDD for Different Customer Types

Individuals:
Verify personal details, source of income, and occupation.

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Corporate Entities:

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Identify bene cial owners, understand the nature of the business, and verify through

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company registries.

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Trusts and Foundations:

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Verify trustees, settlors, bene ciaries, and understand the purpose of the trust.

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Non-Pro t Organizations (NPOs):

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Check for legitimacy and ensure funds are not used for illicit purposes.

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6. Risk Indicators and Red Flags

Customer Behavior:
Reluctance to provide information, complex structures, unusual transaction patterns.

Geographic Risk:

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Customers from high-risk jurisdictions or sanctioned countries.

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Business Risk:
Involvement in high-risk sectors (e.g., gambling, virtual assets, arms trade).

7. Case Studies

Case Study 1: Corporate Entity - Shell Company:

A corporate customer was identi ed as a shell company with complex ownership structures,
leading to further EDD and eventual account closure.

Case Study 2: High-Risk Individual - PEP:

An account linked to a PEP showed signi cant in ows from politically sensitive countries,
triggering SAR (Suspicious Activity Report) ling.

8. Technology and CDD

Role of Technology:
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 Use of AI and machine learning for enhanced risk scoring, automated transaction
monitoring, and identity veri cation.

KYC Utilities:
Shared databases for customer information, reducing onboarding time and improving
accuracy.

9. Challenges in CDD Implementation

Data Privacy Concerns:

Balancing compliance with data protection laws (e.g., GDPR).

Complex Ownership Structures:

Dif culty in identifying UBOs (Ultimate Bene cial Owners) in complex corporate setups.

Regulatory Changes:

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Staying updated with evolving global and local regulations.

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10. Best Practices for Effective CDD

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Strong Governance Framework:

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Establish clear policies, procedures, and escalation protocols.

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Regular Training and Awareness:
Continuous training for staff to recognize and respond to red ags.

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Leveraging Technology:

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Use advanced tools for automation, data analytics, and effective monitoring.

11. Conclusion

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CDD as a Pillar of AML: Effective CDD is essential for preventing nancial crimes and

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maintaining the integrity of the nancial system. Organizations must stay proactive and adaptable to
changing regulatory landscapes.

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