Why CDD is essential for companies subject to AML legislation

In 2020, a new money laundering directive was issued, which was called AML 5. This new directive emphasised that companies were now forced to move to a risk assessment model to combat money laundering. AML 5 also required companies to put more effort into assessing their customers. This is where CDD comes into the picture - but what does it mean?

CDD is an acronym for "Customer Due Diligence." The term expresses the procedures that a company must use to be able to verify the identity of a potential customer, as well as assess their risk level and background information.

All these procedures must be completed before the potential customer can sign a legal contract and thus officially become a customer. Both individuals and other companies can end up in a CDD investigation if they want to become another company's customers.

What makes CDD important?

There are several reasons why it is a good idea for a company to have reasonable CDD procedures:

• To protect the company from potential risks.
• To make the best possible decisions as a company.
• To comply with laws.
• To protect the business from fraud such as identity theft.
• To help the company identify the unusual behavior of the company's customers.

For these reasons, a CDD procedure can be a necessary tool for various companies. However, it is an essential tool for companies subject to anti-money laundering laws.

A checklist for CDD

CDD data can consist of many different pieces of information about a single customer. This information makes it possible to assess the extent to which the customer can put the company at risk. This danger may include the company being misused for money laundering or terrorist financing.

The information about the customers may consist of: 

1. The client's identity

These can be names, addresses, photos, and birth certificates.

2. Background check 

Here, the potential customer is screened for PEP and media. This may be for whether the customer is a politically exposed person with a greater likelihood of financial crime or whether the potential customer has been the subject of a scandal or other worrisome activity.

3. Ownership

It is essential that, if the potential customer is another company, you make sure who the actual owner of the potential customer's company is.

4. Customer relations

Here you have to create an overview of what the potential customer wants from the partnership and the professional relationship between the company and the potential customer.

CDD for high-risk customers

Specific customers have a higher risk profile than others. It can, for example, be PEPs. In some instances where PEPs wish to be clients, an EDD – Enhanced Due Diligence must be prepared.
When preparing an EDD, you examine the potential customers:

• Legal matters
• Finance and taxes
• Activate
• And regular checks and assessments are made

CDD in connection with money laundering

A CDD procedure is mainly indispensable for companies subject to AML legislation, as they are necessary to carry out the individual customer's risk assessment.
In almost all cases, there is a need to implement both CDD and KYC information to get a valuable overview of the client's risk profile.

CDD and KYC procedures are required for:

• New customers
• Single transactions
• Suspicion of money laundering
• Defective or missing documentation