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Customer Due Diligence (CDD)

Mohammad HumaidPublished at: February 14, 2025 Updated at: February 18, 2025

Customer Due Diligence (CDD) is a primary element of modern KYC and AML regulation that is followed by all financial institutions. In an increasingly complex global landscape, organisations must verify the identity of their customers, assess risks, and continually monitor transactions.

This guide explores the importance of CDD, explaining what customer due diligence is, its key requirements, and how organisations can implement effective CDD software and AI-powered CDD tools to streamline compliance and enhance risk management.

What Is Customer Due Diligence (CDD)?

Customer Due Diligence (CDD) is an essential component of the broader Know Your Customer (KYC) and Anti-Money Laundering (AML) frameworks. It involves thoroughly vetting potential clients to ensure they pose no significant risk before onboarding.

CDD is a systematic process that typically includes obtaining key personal details—such as name, address, and date of birth—and verifying these details using official government-issued identification.

The Customer Due Diligence process plays a crucial role in assessing risk levels and preventing the institution from engaging with individuals involved in illegal activities such as money laundering, fraud, or terrorist financing.

However, performing due diligence manually at every step—collecting data, verifying identities, and monitoring transactions—can be incredibly time-consuming and challenging. CDD software and tools streamline this process, automating the verification of identities and risk assessments so that organizations can efficiently manage their compliance obligations with maximum efficiency.

Three levels of Customer Due Diligence

Not all customers require the same level of scrutiny, and the CDD process is typically tailored to reflect varying degrees of risk. Organisations commonly adopt one of three approaches:

Standard Due Diligence is applied to the majority of customers. It involves basic identity verification and a preliminary risk assessment that is sufficient for low- to moderate-risk individuals and entities.

Simplified Due Diligence is utilised when the risk of financial crime is minimal. In such cases, organisations may limit the scope of the checks required, relying on publicly available information and minimal documentation.

Enhanced Due Diligence (EDD) is reserved for high-risk customers. These may include politically exposed persons (PEPs), entities operating in high-risk jurisdictions, or clients whose transaction patterns raise red flags. EDD involves more detailed scrutiny, including comprehensive background checks, analysis of the source of funds, and more frequent ongoing monitoring

Read More: What is Enhanced Due Diligence?

Customer Due Diligence Requirements

An effective Customer Due Diligence (CDD) process is critical for identifying, assessing, and managing the risks associated with new and existing customers. It generally comprises four main stages, each playing a vital role in building a robust compliance framework.

Customer Identification and Verification

Information Collection: This initial step lays the groundwork for building a comprehensive customer profile. Financial institutions begin by gathering vital information such as

Full name
Residential address
Date of birth
Government-issued identification number (e.g. passport or driving licence)

Document Verification: Once the necessary information is gathered, the next step is verifying the authenticity of these documents. This may involve checking the validity of a passport or driving licence through independent databases, utilising biometric data (e.g. facial recognition) to match the customer’s live image with that on their ID, and cross-referencing corporate documents with official government registries.

AML Screening: Once identity details are collected and verified, customer data is cross-referenced against global sanctions lists and adverse media sources. This screening process helps flag any red flags, such as connections to illicit activities, ensuring that high-risk individuals are identified early in the onboarding process.

Read more: What is AML Screening?

Customer Due Diligence Software

By automating key elements of the CDD process—from KYC (identity verification) to AML screening and monitoring—Binderr reduces manual errors and speeds up client onboarding. Here’s how:

eIDV: Binderr’s advanced ID verification solution leverages cutting-edge biometric face recognition technology. As a result, the initial step of CDD—verifying customer identity is completed accurately while significantly reducing the risk of identity fraud.

AI-Based AML Screening: Binderr AML screening solution screens users against global watchlists, politically exposed persons (PEPs), sanctions, and adverse media. It ensures that any high-risk individuals are flagged for further review or enhanced Customer Due Diligence

Beneficial Ownership Identification

A crucial requirement of Customer Due Diligence involves reviewing shareholder registers, leveraging third-party databases, and sometimes even conducting manual investigations to understand the control dynamics within a company.

Identifying True Owners: For legal entities, simply verifying corporate documents isn’t enough. It is essential to identify the natural persons who ultimately own or control the company—often referred to as the ultimate beneficial owners (UBOs). Typically, a threshold (such as a 25% ownership stake) is used to determine which individuals must be identified and verified.

The Financial institutions often conduct AML screening on these UBOs and cross-reference this data against sanctions lists and adverse media reports to ensure compliance.

Binderr screening illustration blog version

Mapping Complex Ownership Structures: Many companies, especially those that are privately held, may have intricate ownership structures involving multiple layers of control. Effective CDD requires constructing a clear chain-of-ownership to uncover any hidden or shell companies that might be used to conceal illicit funds.

Map Structures and Verify UBOs in One Click

Binderr lets you unravel and map entire corporate ownership structures with just one click. In addition, you can verify and bulk screen all Ultimate Beneficial Owners (UBOs), board members, and key stakeholders using our advanced KYC and AML screening solution.

This advanced CDD solution not only streamlines the due diligence process but also significantly reduces manual efforts, ensuring that you remain ahead of regulatory demands while efficiently managing risk.

Understanding the Nature and Purpose of Customer Relationships

Customer Due Diligence goes beyond identity verification by helping organisations understand a customer's intent, transaction behaviour, and risk level. For example why a customer is opening an account and what kind of transactions they plan to carry out.

This step might include obtaining information on the source of funds, anticipated transaction volumes, and the typical nature of business activities. Implementing customer due diligence solutions or CDD software ensures this process is efficient and accurate.

Risk assessment: All gathered data is used to create a customer risk profile. This profile considers factors such as the customer's geographic location, business type, transaction frequency, and historical behaviour. Advanced customer due diligence software leverages AI to detect financial crime indicators more effectively.

Risk Categorisation: Based on the risk assessment, customers are classified into different risk categories—standard, simplified, or enhanced due diligence. Risk classification ensures that higher-risk profiles receive closer scrutiny while lower-risk customers undergo a streamlined process.

Enhanced Due Diligence EDD

For high risk customers, institutions conduct Enhanced Due Diligence (EDD) which is detailed background investigations. EDD is a more rigorous level of scrutiny applied to customers or transactions that pose a higher risk, such as politically exposed persons (PEPs) or individuals from high-risk regions.

EDD involves

Gathering additional identification details
Verifying the source of funds and wealth,
Understanding of the customer's business activities
Intended purpose of their transactions.

Unlike standard due diligence, EDD requires continuous monitoring and periodic reassessment of the customer’s risk profile to promptly detect and address any suspicious activities.

Read more: The Difference Between CDD and EDD

Ongoing Monitoring and Reporting Suspicious Activities

Customer Due Diligence (CDD) isn’t limited to the onboarding process. Institutions must continuously monitor customer transactions to ensure they align with the established risk profile.

Moreover, changes in circumstances—such as a change in address, new business activities, or alterations in the ownership structure—necessitate updates to the customer’s profile. This ongoing due diligence is essential to maintain up-to-date records.

Institutions should also actively file SARs (Suspicious Activities Reports) when suspicious activities are identified, ensuring all regulatory requirements are met.

CDD Software

By leveraging state-of-the-art Customer Due Diligence Software, financial institutions can build a resilient compliance framework. These tools streamline the entire CDD process—from initial identification to ongoing monitoring—ensuring that every customer is thoroughly checked before onboarding.

Binderr CDD Solutions Features

Identity Verification: Biometric facial recognition and document verification ensure secure onboarding.
AI-Based AML Screening: Instantly screen users against sanctions, PEPs, and adverse media lists.
Dynamic Risk Assessment: AI-driven risk scoring categorises customers for tailored due diligence.
Real-Time Monitoring: Detects unusual transactions and high-risk behaviour automatically.

Binderr’s customer due diligence solution eliminates manual work, ensuring faster, smarter, and fully compliant CDD processes. 🚀

The Importance of CDD

Reports show that money laundering could impact between 2% and 5% of the world’s GDP annually. And Customer Due Diligence (CDD) is absolutely essential for maintaining both financial security and regulatory compliance.

Here is the detailed breakdown of the importance of CDD Customer Due Diligence:

Risk Mitigation

Prevention of Financial Crime: Verifying customer identities helps prevent money laundering, terrorist financing, and other financial crimes. Early detection of suspicious activities reduces the chance of fraudulent transactions taking place.

Reduction in Identity Fraud: Comprehensive identity checks, including biometric verification, minimise the risk of impersonation or identity theft. Detailed customer profiles help flag inconsistencies that might indicate illicit activity.

Dynamic Risk Management: Continuous updating of customer information ensures that risk profiles remain current, allowing for adaptive due diligence. Efficient monitoring processes reduce manual effort and improve overall operational efficiency.

Regulatory Compliance

Adherence to Legal Standards: A robust CDD programme ensures compliance with national and international AML/KYC regulations. Meeting regulatory standards reduces the risk of penalties, fines, and legal actions.

Streamlined Audits: Well-documented and up-to-date customer information facilitates smoother regulatory audits and examinations. Consistent application of due diligence procedures builds confidence with supervisory authorities.

Reputation Management

Demonstrating rigorous due diligence shows a commitment to ethical standards, which boosts client and partner trust. Moreover, transparent and accountable processes improve the credibility of the business with investors, clients, and partners.

When is Customer Due Diligence Performed?

Client onboarding

CDD is a core component of the client onboarding process–which involves verifying identity and assessing risk to ensure that only trustworthy clients are accepted.
Establish a compliant foundation for client onboarding that minimizes the risk of illicit activities.

High-value or occasional transactions

When transactions exceed regulatory thresholds or are structured to avoid detection, CDD must be applied.
Analyze large or fragmented transactions to flag potential money laundering or fraud.
Ensure that these transactions are thoroughly vetted to prevent circumvention of standard checks.

Unusual activity

If customer information is inconsistent or behavioural patterns deviate from the norm, enhanced CDD is required.
Scrutinize anomalies like sudden transaction spikes or unexpected changes in behaviour.
Implement additional checks to verify legitimacy and update risk assessments as needed.

High-risk profiles

Customers classified as high-risk (e.g. politically exposed persons or those from high-risk jurisdictions) demand additional scrutiny through enhanced due diligence.
Conduct rigorous checks, including beneficial ownership verification and adverse media screening, to mitigate higher inherent risks.
Apply extra layers of verification to ensure compliance with stringent regulatory requirements.

The Regulatory Landscape for CDD

Regulators around the world have established stringent rules for CDD to safeguard the financial system. Some key frameworks include:

FATF Recommendations (Global Standards): The Financial Action Task Force (FATF) sets international standards that require all countries to implement risk-based CDD measures.
EU Directives: European regulations, such as the EU’s Corporate Sustainability Due Diligence Directive, indirectly impact CDD practices by requiring thorough verification of customer data and beneficial ownership details.
United States: The Financial Crimes Enforcement Network (FinCEN) has implemented the CDD Final Rule, which mandates that banks verify beneficial ownership and continually monitor customer activities.
National Guidelines: Many countries, including the United Kingdom, follow local regulatory guidelines that mirror international standards, with heavy penalties for non-compliance. For example, failure to conduct adequate CDD in 2022 contributed to fines nearing billions of dollars globally.

Bottom Line: Customer Due Diligence Solutions

Customer Due Diligence is an essential pillar of modern financial compliance. By verifying identities, understanding customer relationships, and continually monitoring transactions, organisations can significantly mitigate the risks of financial crime and regulatory non-compliance.

While the process can be complex and resource-intensive, leveraging technology—such as the innovative solutions offered by Binderr—can streamline compliance efforts and ensure that customer due diligence procedures remain robust and up-to-date.

Binderr is an all-in-one compliance platform that offers comprehensive KYC, KYB, and AML solutions, streamlining your entire compliance process. With Binderr, you can:

Automate Client Onboarding: Reduce onboarding time and boost overall efficiency.
Verify Identities: Our KYC solution utilises advanced biometric verification (including facial recognition) and document verification technology to accurately confirm user identities.
Verify Business Entities and UBOs: The KYB solution enables the verification of business details and identification of ultimate beneficial owners (UBOs).
Conduct AML Screening: Screen users against watchlists, sanctions, politically exposed persons (PEPs), and adverse media.
Monitor Risk Continuously: Keep customer data up-to-date with live data syncing and AI-powered risk assessments.
Risk Assessment: Benefit from an advanced risk assessment feature that assigns an AI-driven risk score to each customer. This allows you to categorise customers based on their risk profiles, ensuring that high-risk clients receive enhanced scrutiny while low-risk clients benefit from a streamlined process.

By integrating Binderr into your compliance programme, you can achieve a seamless and robust CDD process, ensuring that your organisation remains ahead of regulatory demands.

CDD Customer Due Diligence FAQs

What Is Customer Due Diligence?

Customer Due Diligence (CDD) is the process financial institutions use to verify customer identities, assess risk, and prevent financial crimes like money laundering and fraud. It is a key part of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.

CDD helps financial institutions comply with regulations, prevent fraud, and protect the financial system from criminal activities. By verifying customers and assessing risk, institutions safeguard their reputation and assist law enforcement in detecting financial crimes.

Key Components of CDD

Identity Verification: Institutions collect and verify customer details, such as name, address, and date of birth, using government-issued IDs, biometrics, or digital tools.

Risk Assessment: Customers are evaluated based on factors like location, transaction history, and business type, categorising them as low, medium, or high-risk.

Beneficial Ownership Identification: For businesses, identifying and verifying ultimate beneficial owners (UBOs) prevents the misuse of corporate structures.

Ongoing Monitoring: CDD is not a one-time check—it requires periodic reviews and monitoring to reflect changes in customer behaviour. Automated CDD solutions using AI and machine learning help streamline this process, reducing manual effort and ensuring regulatory compliance.

What Are the 4 Customer Due Diligence Requirements?

Effective CDD solutions are built around four primary requirements:

Customer Identification and Verification: Collect essential details such as full name, date of birth, and address. Use government-issued documents—like passports or driving licences—to verify this information. Modern customer due diligence software automates this process for faster onboarding.
Beneficial Ownership Identification: For corporate clients, it’s crucial to identify and verify the ultimate beneficial owners. Advanced CDD tools can cross-check ownership details against public records and sanction lists.
Understanding the Purpose of the Business Relationship: Document why a customer is establishing a relationship with your institution, including the intended use of the account and the nature of transactions. This is a key function in many CDD solutions that help establish a baseline for normal activity.
Ongoing Monitoring: Continuously review customer transactions and update profiles. With AI-powered customer due diligence solutions, institutions can automatically flag unusual activities and promptly file Suspicious Activity Reports (SARs).

What is customer due diligence software?

Customer Due Diligence (CDD) software is a specialised tool designed to automate and streamline the process of verifying customer identities and assessing risk as part of broader KYC (Know Your Customer) and AML (Anti-Money Laundering) measures. Here’s an in-depth look at what it is and how it supports compliance:

Identity Verification (eIDV): CDD software utilises advanced technologies—including biometric verification such as facial recognition—to rapidly and accurately validate government-issued IDs and other critical documents. This ensures that customer identities are confirmed without the delays of manual checks.

Risk Assessment and Scoring: These tools analyse customer data to generate AI-driven risk scores. By categorising customers based on their risk profiles, the software enables institutions to apply enhanced due diligence for high-risk cases and simplified checks for low-risk ones.

Cross-Referencing and Screening: The software automatically cross-references customer details against global sanctions lists, politically exposed persons (PEP) databases, adverse media, and other watchlists. This helps detect any potential red flags early in the onboarding process.

Ongoing Monitoring: CDD solutions continuously monitor transactions and update customer profiles in real time. This ongoing due diligence is crucial for identifying any unusual or suspicious activities as customer circumstances evolve.

What are the Benefits of Using CDD Software?

Here are the benefits of using customer due diligence solutions

Efficiency and Accuracy: Automating the due diligence process reduces manual errors and frees up resources, enabling faster onboarding and more effective risk management.

Regulatory Compliance: With the ever-changing regulatory landscape, CDD software ensures that institutions remain compliant with KYC and AML regulations, reducing the risk of hefty fines and reputational damage.

Streamlined Workflow: Integrating with existing systems, these tools provide a seamless workflow that consolidates data collection, verification, and monitoring into one cohesive platform.

Enhanced Risk Management: By leveraging AI and machine learning, customer due diligence solutions offer precise risk assessments, allowing financial institutions to focus resources on high-risk customers and maintain robust control over their compliance processes.

When Should You Repeat Due Diligence on a Customer?

Due diligence is not a one-off task. You should repeat due diligence in the following scenarios:

Periodic Reviews: Depending on the customer’s risk profile, periodic reviews (annually, bi-annually, or quarterly for high-risk cases) are necessary.
Material Changes: When significant changes occur in a customer’s business activities, ownership structure, or geographic location, updated reviews are required.
Trigger Events: If transactions deviate from a customer's typical behaviour or if any suspicious activities are detected, a fresh round of due diligence should be performed using your customer due diligence solution.

What Is the Purpose of Customer Due Diligence?

The purpose of CDD is multi-fold:

Risk Mitigation:By verifying identities and understanding financial behaviours, CDD helps prevent money laundering, fraud, and terrorist financing.
Regulatory Compliance:CDD ensures compliance with laws and regulations such as KYC and AML, reducing the risk of fines and sanctions.
Protecting Reputation:Thorough CDD helps maintain the integrity of your institution by ensuring that only low-risk customers are onboarded.
Supporting Law Enforcement:Detailed customer records can be invaluable during investigations into financial crimes.

Utilising robust customer due diligence software helps institutions achieve these objectives efficiently.

When Is Customer Due Diligence Required?

CDD is essential at multiple stages to ensure compliance and risk mitigation:

✅ During Onboarding:
When a new customer is added, full due diligence is conducted to verify identity, assess risk, and confirm compliance with regulatory standards. This includes collecting documents, screening against watchlists, and evaluating the nature of the business relationship.

✅ For Significant Transactions:
Transactions that exceed pre-set monetary thresholds or appear unusual require enhanced scrutiny. Financial institutions assess the source of funds, transaction patterns, and potential links to money laundering or fraud.

✅ Following Trigger Events:
Any significant changes in a customer's profile—such as a sudden shift in transaction behaviour, a change in beneficial ownership, or involvement in legal disputes—necessitate an updated due diligence review to reassess associated risks.

✅ For Ongoing Monitoring:
Continuous CDD ensures customer profiles remain up-to-date. Automated systems track transactions and flag inconsistencies, helping institutions proactively manage risk and comply with evolving regulations.

Why Is Customer Due Diligence Important?

Customer Due Diligence is vital because:

Prevention of Financial Crime:It is a critical defence against money laundering, fraud, and terrorist financing.
Regulatory Adherence:CDD helps institutions remain compliant with stringent KYC and AML regulations.
Risk Management:It enables a clear understanding of customer risk, helping to allocate resources where they are most needed.
Enhanced Transparency:Comprehensive due diligence improves overall trust and transparency in the financial system.

Modern CDD solutions and customer due diligence tools play a crucial role in achieving these benefits.

What Records Must Be Kept for Customer Due Diligence?

Financial institutions are required to maintain detailed records, including:

Identification Documents:Copies of passports, driving licences, utility bills, and other verification documents.
Customer Information:Personal or business data collected during onboarding.
Risk Assessments:Documentation of risk profiles and classification decisions.
Transaction Monitoring Logs:Records of ongoing reviews and any anomalies detected.
Suspicious Activity Reports (SARs):Documentation of all SARs filed when suspicious activities are observed.

Using effective customer due diligence solutions ensures that these records are securely maintained and easily accessible for audits or regulatory reviews.

What Is the Customer Due Diligence Process?

The CDD process involves multiple steps to ensure financial institutions comply with regulations and mitigate risks effectively:

✅ Initial Identification:
Collecting and verifying customer information, such as name, address, date of birth, and business details. This includes validating official documents and performing identity verification using biometric and digital tools.

✅ Risk Assessment:
Evaluating customer risk profiles by analysing factors such as geographic location, business activities, and transaction behaviour. AI-driven risk scoring categorises customers into low, medium, or high-risk groups.

✅ Enhanced Information Collection:
For high-risk customers, institutions gather additional details, including the source of funds, ownership structures, and adverse media checks. This ensures compliance with AML and CDD requirements.

✅ Ongoing Monitoring:
Continuous tracking of transactions and customer activities to detect suspicious behaviour. AI-powered systems flag anomalies, update risk profiles, and trigger alerts for further investigation.

This comprehensive process is often supported by customer due diligence software, enabling automation, real-time data analysis, and efficient compliance management.