Although KYC and AML are often used interchangeably, they do not have the same meaning, and confusion can have costly consequences for your business....
What is CDD?
CDD stands for Customer Due Diligence – the term becomes significant in the new directive in the Money Laundering Act (AML 5) – why? Read and find out.
CDD stands for "Customer Due Diligence." CDD is a crucial term due to the Money Laundering Act. To the same extent as the KYC concept, CDD is an aid within the customer due diligence procedure.
In the new directive in the Money Laundering Act (AML 5), which entered into force in 2020, greater emphasis is placed on the fact that companies must know their customers. This is where CDD comes into the picture.
The term CDD includes all the different procedures companies use to verify the identity of their customers. They also use this procedure to assess the customers' background, business activity, and level of risk.
A large part of these procedures must occur before the potential customer signs the contract with the company, becoming an official customer.
Both companies and individuals can be subject to a CDD procedure.
What makes CDD important?
There are many reasons a company should have these CDD procedures in place to screen their potential customers.
The CDD processor must be considered a tool that is necessary for the company - and especially for those companies that are subject to the Money Laundering Act.
Essential reasons for having a CDD procedure can be;
- To be able to protect one's own company against potential risks.
- To be able to make the best choices as a company.
- To comply with the law.
- To protect the company from fraud.
- To be able to help the company identify unusual behavior among the company's customers.
What should be investigated?
As a result of creating a CDD process for the company, several different types of information about the potential customer must be obtained. It must then be assessed whether the customer exposes the company to the risk of being exploited for, e.g., money laundering or terrorist financing.
The information to be used is:
- The customer's identity can be name, address, and birth certificate.
- The customer's background – here, a PEP screening and a media screening are typically carried out. This ensures that a politically exposed person does not own the customer or that the customer's owner has previously been involved in a scandal.
- Ownership – this is used if the customer is another company. It is therefore vital to know who owns the company.
- The relationship between you and the customer - to get an overview of the professional relationship.
Is the CDD procedure indispensable in connection with money laundering?
A short and simple answer is: Yes.
A CDD procedure is indispensable for companies subject to the Money Laundering Act. This is because they must be able to carry out individual risk assessments of customers.
In several cases, companies use both CDD but also KYC information to be able to find an overview of the customer's risk profile and, at the same time to be able to establish their identity. A KYC procedure helps companies to meet the requirements before they can say they know their customer.
Both the CDD and KYC procedures are, e.g., required by:
- New customers - before a customer becomes a real customer, verifying their identity is a good idea.
- Individual transactions – banks and companies within the financial sector should investigate their customers for suspicious behavior. This can be in the form of a considerable amount being transferred or transferring to a high-risk country.
- Suspicion of money laundering – doing a thorough background check on the customer is significant if there is a suspicion of money laundering with the customer.
- Paperwork mess – The company should if the customer cannot show a valid identification document.