What is Customer Due Diligence?
What is Customer Due Diligence (CDD)?
Do you know your SDD from your EDD? Do you understand the significance of 25% beneficial ownership? Can you differentiate between passive ownership and effective control? Do you know the difference between a bare trust and a discretionary trust? Why does it matter?
The above terms are commonly used when talking about Customer Due Diligence (CDD) – so what is it?
Customer due diligence (CDD) underpins a firm’s enterprise-wide management of financial crime risk from money launder to fraud, from market abuse to corruption, from tax evasion to sanctions evasion and everything that falls in between.
It is the process by which a firm identifies with or for whom it is conducting business, who is benefiting from any arrangements, the source of wealth a firm might be managing, the business arrangements of clients and both the upstream and downstream supply chain, the political status of clients or any potentially unsavoury information about a client or their business arrangements.
The aim of CDD is for firms to ‘know’ their clients (a requirement under the Money Laundering Regulations) in order to identify risk so that it can be appropriately managed or mitigated, and to assist in the identification and reporting of suspicious activities to the relevant competent authorities.
The application of CDD measures can also help protect clients e.g. from falling victim to fraud.
You may have heard the following terms:
- “KYC” (Know Your Customer/Client)
- “KYCB” (Know Your Customer’s Business)
- “KYCC” (Know Your Customer’s Customer)
- “KYCS” (Know Your Customer’s Suppliers)
- “KYE” (Know Your Everyone/Everything)
“Knowing” this information, understanding the implications from a financial crime risk management perspective and is all part of the wider CDD obligation but you cannot “Know” any of this unless you have undertaken appropriate due diligence on your customer and made enquiries into areas such as legal form, business models, geographical footprint and beneficial ownership.
CDD helps identify ‘red flags’ – indicators of potential risk (e.g. complexity or opacity in a corporate structure) that might require further investigation or highlight illegality.
Can you identify the red flags in the below structure chart? What are the implications for the CDD process? What are the potential risks for the firm?
“Knowing” your client is the ultimate destination, with CDD the journey to get there – but this crucial journey never ends and it is not always straightforward (I feel a John Lennon song coming on….). It might require unwrapping corporate structures across multiple jurisdictions or the identification of beneficial owners hiding behind nominees or proxies. (How did you do with the teaser above?). It means understanding why a corporate entity is structured the way it is, not just how it is structured. CDD means understanding where to get information and how to make an assessment of relevance and reliability. It also means e.g. understanding the legitimate reasons for complex corporate structures.
CDD also includes the ongoing monitoring of a client’s activities and transactions to ensure they are within expectation, to ensure that there have been no changes in ownership or control and that the relationship is still acceptable from a risk perspective.
CDD requirements vary according to perceived risk, legal person type, product or service requirement and jurisdiction, to name a few criteria. There is no one size fits all approach. GCAL can help give you the skills that will enable you to maintain, develop new or enhance your level of understanding of financial crime risk management responsibilities.
 10 points for those that got ‘The Long and Winding Road’!!