KYC and CDD are crucial processes fall under the umbrella of an Anti-Money Laundering (AML) service. KYC and CDD are both checks that a financial institution will go through, and if this does not comply with AML regulatory compliance laws, civil penalties and fines may apply. While they affect one another, KYC and CDD each serve their purposes and roles. So, let’s understand the difference between customer due diligence and KYC in detail!
What are the CDD and KYC Processes?
KYC or Know Your Customer, as the term implies, is identifying and verifying the identity of a client or customer who either has an account with the financial institution or is looking to open an account. KYC is also about minimising risk and requires information from the customer before any business relationship is formed. Financial institutions do this mostly through digital onboarding, which includes customer information and document verification.
KYC is also referred to as “identity verification.” This process applies to both individual users and businesses. Know Your Business (KYB) or corporate KYC for companies. These standards help detect, report and ultimately prevent fraud and financial crime.
However, customer due diligence (CDD) is a continuous process that establishes customer risk levels and is a crucial aspect of KYC. As it is mandatory to keep and update transaction records, CDD checks are performed by companies continuously throughout the entire customer relationship cycle.
CDD is a necessary piece of the KYC compliance process that occurs during customer onboarding but remains throughout the lifecycle. At first, an account may appear compliant according to the law, but later, it may show suspicious activity. Simply put, customer risk profiles fluctuate, making CDD an ongoing process.
What’s the Main Difference Between KYC and CDD Procedures?
KYC checks happen earlier than CDD procedures because they begin before companies start working with new customers. Business relationships begin with KYC screening of potential customers to establish the first contact during verification, but CDD operates throughout the relationship by tracking abnormal money laundering activities. An AML program consists of KYC and CDD among its essential components.
KYC serves as a process for businesses to authenticate customer identities to verify their identity. The CDD involves continuous assurance protocols for management. The framework guarantees stability across KYC evaluations from the customer origin point until their full relationship cycle with stakeholders exists by maintaining a compliant AML program design.
Here’s the difference between customer due diligence and KYC:
| Features | Know Your Customer | Customer Due Diligence |
| Purpose | Verifies customer identity before business engagement | Monitors transactions and identifies suspicious activity |
| Focus | Establishes the legitimacy of customer identity | Ensures ongoing compliance and risk management |
| Process Type | One-time verification at the start | Continuous evaluation during the relationship |
| Goal | Prevents fraud and financial crimes at the onboarding stage | Detects and mitigates suspicious financial activities over time |
What are the Main Functions of KYC and CDD?
KYC and CDD operations consist of three main functional components.
- Customer Identification Program
Financial services companies must maintain a Customer Identification Program according to the Patriot Act to confirm their knowledge of customers’ identities and establish a well-founded belief in them. The USA Patriot Act mandates that financial institutions collect four pieces of identifying information: full names, date of birth, legal addresses, and valid ID numbers (Social Security Number or Taxpayer Identification Number) from potential clients.
- Customer Due Diligence
Each customer risk profile exists through verification of their identity and background checks that consist of wealth source evaluations. The screening process needs to take place indefinitely throughout all operational periods.
- Ongoing Monitoring
The Perpetual KYC (pKYC) system enables continuous monitoring by checking customer transactions to discover irregular behaviour that implies criminal financial activities. Additional measures involve rechecking customers based on their predefined risk factors.
Understand All the Different Levels of CDD
Financial institutions perform customer due diligence processes at different levels depending on the characteristics of their interactions with customers. The verification process for bank app withdrawals depends on the transaction amount because small withdrawals require fewer checks than huge, unexpected account fund withdrawals.
The extent of following CDD checks depends on the risk associated with the customers:
Simplified Due Diligence
- The procedure serves customers who conduct minimal transactions and maintain minimal exposure to suspicious geographic areas.
- Identification procedures in CDD operations require collecting clients’ names, verifying addresses, and collecting identification documents.
Standard Due Diligence
- The system targets customers presenting moderately high risks through the high number of transactions or working in dangerous business areas or locations.
- The process demands additional information about the funds’ origins and details about professional work history and business connections.
- The process includes actively monitoring changes in the customer’s risk behaviour and profile development.
Enhanced Due Diligence
- The identification process concentrates on politically exposed persons (PEPs), wealthy clients, and entities operating in dangerous sectors or jurisdictions.
- A complete investigation into customer background includes a source of wealth verification and evaluation of connections to risky entities.
- Professional monitoring of suspicious customer activities must be done continuously to allow businesses know about questionable activities.
Integration of KYC and CDD in non-financial industry
The financial sector originally instituted KYC and CDD regulations. However, companies in various sectors must implement these practices because non-financial industries face increasing threats of fraud and money laundering activities. Among them:
Real Estate Sector
Property sales and real estate acquisitions are common methods for money laundering operations. Implementing KYC and CDD solutions proves essential because it enables businesses to verify the legitimate nature of their paying and receiving parties.
Also, organisations must authenticate customers and vendors while investigating funding sources involved in their transactions. KYC with CDD procedures helps real estate businesses protect themselves from risks while upholding the requirements of AML regulations.
Cryptocurrencies
Blockchain-based transactions in cryptocurrencies operate anonymously, which makes this sector easily accessible for illegal purposes. Cryptocurrency exchanges and related services must adopt security practices implementing KYC and CDD to stop money laundering and terrorist financing.
AML-compliant cryptocurrency platforms need users to pass KYC procedures for platform access, whereas they utilise CDD mechanisms to follow transactions and watch for suspicious transactions.
Online Gambling and Betting
KYC and CDD must be implemented by online gambling and betting platforms throughout multiple countries. Marketplace operators handling gaming activities require player identification confirmations to stop fraud while maintaining the age requirements and regulatory standards.
The continuous tracking of player performance enables the detection of abnormal player conduct, which is a potential indicator of money laundering activities.
Challenges During Implementation of KYC and CDD Processes
Businesses must establish required practices to satisfy KYC and AML regulatory standards, although these processes prove difficult to implement. Companies often encounter these common obstacles during the implementation of these processes. Below, you will find common challenges and possible solutions to overcome them:
- Data Protection and GDPR Compliance
Protecting personal data obtained through these processes proves challenging because GDPR and similar regulations in the European Union possess strong privacy standards. Organisations must maintain secure data processing while obtaining explicit customer permission throughout data collection and handling procedures.
Companies should deploy progressive encryption solutions to keep their data in motion and when it still rests. Businesses must create defined specifications describing data storage times and secure deletion protocols for outdated data records. Companies need to perform regular audits as an essential method to maintain ongoing GDPR compliance alongside other privacy regulations.
- Technological Integration and Legacy Systems
Companies operating on older IT systems experience complications when connecting new CDD and KYC solutions to their present technological platforms. When different systems fail to work together properly, efficiency problems emerge with duplicate data entries and security vulnerabilities.
Cloud-based KYC and CDD platforms solve this issue by providing legacy systems with adaptable integration and easy deployment methods. The platforms come with API functionality that benefits integration with multiple systems. Both staff training programs and spending on improved technological infrastructure are vital for removing these obstacles from implementation.
- Managing Data Volume and Scalability
Large corporations’ KYC and CDD processes that deal with many clients experience challenges when attempting to expand their verification operations. Nevertheless, the continued execution of manual verification leads to unsustainable operations, causes process delays, and elevates the risk of errors.
Moreover, a business requires automation to excel in volume management and scale operations. Integrating artificial intelligence (AI) and machine learning systems enables automatic identity verification, fast data processing, and fraud detection through susceptibility pattern recognition.
- Handling International Clients and Multijurisdictional Compliance
International businesses operating across multiple countries encounter difficulties adhering to separate KYC and CDD requirements from local and international sources. Numerous challenges exist because different jurisdictions maintain unharmonised regulations and unique requirements.
Managing this complex situation requires business strategies that adapt KYC and CDD procedures through risk-based methods based on client risk assessments alongside their operational jurisdictions. Companies that employ software tools with instantaneous global regulatory updates maintain their real-time compliance standards.
- Customer Experience and Onboarding Friction
The procedures for KYC vs CDD sometimes trigger negative perceptions of intrusiveness among customers, thus leading to worsened user experience and higher onboarding dropouts.
Organisations must achieve proper regulatory requirements and positive customer experiences by designing straightforward processes. Organisations should adopt quick identity confirmation systems based on face recognition or video authorisation to lower customer barriers and maintain security protocols.
Final Words
Understanding the difference between customer due diligence and KYC is essential for businesses that aim to uphold compliance while reducing financial exposure. Initial identity verification occurs at KYC, but companies need CDD to track suspicious activities throughout the customer relationship period. Therefore, businesses must develop strong KYC and CDD frameworks because regulatory requirements are changing to prevent financial crimes.
Xpert Advisory offers specialised AML compliance consultancy services with KYC and CDD strategy implementation to help businesses achieve effective control framework deployment. Reach out to us to get a robust AML compliance framework for your organisation.
FAQs
Is Customer Due Diligence an Integral Component of KYC?
The essential component of KYC procedures is Customer Due Diligence. The identity verification steps of KYC service operate alongside CDD procedures, which calculate risk evaluation for customers.
When Should Businesses Run CDD Checks?
The implementation of CDD should occur during the onboarding process, and businesses need to monitor activities to identify irregular behaviours. The frequency of checks depends on how risky the customer presents themselves to the company.
What Situations Require Business Operations to Carry Out Enhanced Due Diligence (EDD)?
The EDD procedure becomes necessary when businesses handle clients who are PEPs stem from risky regions or engage in substantial or intricate transactions.
