CDD
Customer Due Diligence (CDD) gives you insight into who your customer really is and what risks that entails. This allows you to comply with legislation and protect your organization against financial and reputational damage.
What is CCD?
Customer Due Diligence (CDD) is the process by which organizations determine who they are doing business with and what risks are involved.
CDD revolves around one central question:
Is this business relationship reliable, and am I permitted to conduct business with them according to laws and regulations?
Customer Due Diligence (CDD) is also known as Know Your Customer. This term literally means appropriate diligence with the customer. Every company has a due diligence obligation and therefore also a customer due diligence policy. Due diligence is about integrity and getting to know a customer or other third party better. Who does your company do business with? Can the customer or supplier pose a risk (both financially and legally)? This prevents a company from doing business with fraudulent/criminal parties.
Financial institutions often bear the greatest responsibility when it comes to due diligence processes. After all, they have the best overview of a company's various cash flows and must therefore comply with the vast majority of due diligence laws. Consider the wwft in the Netherlands and internationally to the AML. Many companies are also subject to the Sanctions Act, or to all of the aforementioned laws. A due diligence process often consists of a KYC check.
Want to learn more about compliance? Then read our blog post: What data do you need for an effective compliance process?
Benefits of a good CDD process
By having a good and streamlined CDD process, you enjoy many benefits. Some of these are:
- By conducting proactive research, you know in advance whether you can/may do business with the customer.
- Do you comply with laws and regulations such as the Wwft, AML guidelines and sanctions legislation and simultaneously builds an audit trail;
- Maintaining your company's good reputation;
- Ensuring ethical business practices
What does a CDD investigation involve?
A CDD investigation consists of various checks that together form a complete risk profile. These are the most important components:
- UBO check: Determine that we are ultimately stakeholders and verify that these individuals are trustworthy.
- Sanctions screening: check whether the customer or UBO appears on national or international sanctions lists.
- PEP check: Determine whether the customer or UBO holds a politically exposed position (PEP), which automatically entails additional risk.
- Risk analysis: Assessing geographic risks, sector-specific risks, and financial patterns.
- Business purpose & origin of funds: Understanding why a customer purchases services and where cash flows originate.
- Continuous monitoring: Verify that customer behavior is consistent with the risk profile and recognize signs of unusual transactions.
When do you conduct a CDD investigation?
You conduct a CDD investigation before you enter into a new business relationship. This applies to:
- new customers
- prospects
- new suppliers
- other third parties
The objective is to determine whether the relationship is ethical, compliant, and acceptable.
How does a CDD investigation work in practice?
A CDD process consists of the following steps:
- 1. Identification & verification
Does the company actually exist and is the information correct? - 2. Structural analysis
Identification of directors, shareholders, and UBOs. - 3. Screening
Monitoring sanctions, PEP status, and other compliance risks. - 4. Assessment & recording
Documenting findings in an audit trail. - 5. Decision-making (traffic light model)
- Green - You may do business with this customer (no issues found).
- Orange - You may do business with this customer, but there are areas that require extra attention (details found).
- Red - You are not permitted to conduct business with this customer. The company or UBO is subject to sanctions, or there are other circumstances that prevent you from conducting business.
CDD and automation
A CDD investigation can be time-consuming, especially in the case of international structures. Fortunately, there are solutions for CDD processes to accelerate or (partially) automate, without compromising on compliance or quality.
Various options are here to be found.
See also our white paper with a checklist to optimize and automate your KYC in 6 steps.
CDD is part of Compliance Management. Read more about this on our Compliance page.
