Customer due diligence
Customer due diligence (CDD) is the set of anti-money-laundering measures requiring financial institutions to identify and verify customers, identify and take reasonable steps to verify beneficial owners, understand the purpose and intended nature of the relationship, and conduct ongoing monitoring. It is the formal regulatory standard behind desk labels such as KYC.
How customer due diligence is used on EF, PF and CRE desks
On export finance, project finance and commercial real estate desks, customer due diligence governs onboarding of borrowers, sponsors, guarantors and other counterparties, and the ongoing refresh of that knowledge through the life of a facility. CDD outputs feed risk rating, enhanced measures where warranted, sanctions-screening inputs and decisions on whether a relationship can proceed.
EBA risk-based application
The European Banking Authority's ML/TF Risk Factors Guidelines, issued under Articles 17 and 18(4) of Directive (EU) 2015/849, set out factors firms should consider when assessing money-laundering and terrorist-financing risk associated with a business relationship or occasional transaction, and how to adjust CDD intensity accordingly. Firms are expected to identify the customer and beneficial owner, verify identity on reliable independent sources, and establish the purpose and intended nature of the relationship, before entering the relationship or carrying out an occasional transaction.
Simplified CDD may apply where risk is low and national law permits; enhanced CDD applies where risk is increased. The EBA is explicit that firms should not de-risk by discontinuing services to entire categories of customers associated with higher risk; instead they must manage that risk proportionately, with individual and business-wide risk assessments underpinning the approach.
Distinctions
Customer due diligence is broader than list-based sanctions screening and broader than adverse media screening, though both inform the customer risk assessment. Ultimate beneficial owner identification is an integral CDD component for legal persons, not an optional add-on. The international standard-setter whose recommendations inform EU and national CDD law is the FATF; desks apply the transposed national rule, not FATF's own text directly.