Customer Due Diligence, often abbreviated to CDD, is now a familiar term for many organisations. Yet in practice there is often uncertainty about what the process involves exactly and how in-depth an investigation needs to be.
What is Customer Due Diligence?
Customer Due Diligence is the process by which an organisation establishes who its customer or business partner really is, and which risks are attached to that relationship. It goes further than simply establishing a name or registration number: CDD looks at the corporate structure, the ultimate beneficial owners, the nature of the business activity and whether that activity logically fits the intended transaction.
CDD is often mentioned in the same breath as KYC (Know Your Customer). In practice, KYC is the narrower identification process, while CDD is the broader risk assessment surrounding it.
The key questions of a CDD investigation
At its core, a thorough due diligence investigation answers the following questions:
- Who is the customer, and who is the ultimate beneficial owner (UBO)?
- What does the corporate structure look like?
- Is there a legitimate, demonstrable business activity?
- Is there adverse media or reputational risk?
- Is a politically exposed person (PEP) involved within the structure?
- Does the transaction fit the customer's profile?
Standard versus Enhanced Due Diligence
Not every customer relationship calls for the same level of scrutiny. A risk-based approach means the depth of the investigation is matched to the risk profile:
- Standard due diligence is usually sufficient where the risk is lower: a transparent structure, a familiar sector and no particular warning signs.
- Enhanced Due Diligence applies where the risk is elevated, for example with complex ownership structures, high-risk countries, PEP involvement or unusual transaction patterns. This calls for additional research, such as into the source of funds or a more extensive media and reputation check.
Why a risk-based approach matters
A uniform, non-risk-based approach often leads to two problems: too much time is spent on research where the risk is low, while too little depth is applied where the risk is high. By making a risk assessment up front, the scope of the investigation matches the actual exposure.
Example from practice
An importer wants to take on a new supplier. The supplier is based in a country with a higher risk profile and has an ownership structure with several intermediate entities. Instead of a standard check, Enhanced Due Diligence is carried out: the UBO structure is fully mapped, adverse media is checked and the business activity is tested against what would logically fit this supplier.
Frequently asked questions
When is Customer Due Diligence required?
When entering into a new business relationship, for transactions with an elevated risk, or when additional information about the customer, UBO or corporate structure is needed.
How long does a CDD investigation take?
A standard investigation is often completed within a few working days. Enhanced Due Diligence or a complex ownership structure may take longer.
Is CDD a one-off check?
Not necessarily. For long-term relationships, periodic reassessment is advisable, especially when the customer's risk profile may change.
TradeRisk supports companies with due diligence, CDD and KYC research, from a standard check to Enhanced Due Diligence. Also read more about what a UBO is and what Enhanced Due Diligence involves.