A Video Overview of Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) with Regology's Esteban Santana

In this video, Esteban Santana, Regology's Financial Services Industry Lead and former Senior Special Agent with the FDIC, addresses what you need to know about customer due diligence (CDD) and enhanced due diligence (EDD).

Video Transcript:

Welcome to today’s video on Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). This information is meant to provide an overview of CDD and EDD to assist banks, credit unions and other entities collect and evaluate relevant information about a potential customer. What is CDD? CDD is the act of performing background checks and screening of a customer to ensure that the customer is properly risk-assessed before being onboarded. During the CDD process, a business typically collects and evaluates information provided by the potential customer.

CDD can be thought of as the heart of Anti-money Laundering (AML) and Know Your Customer (KYC). It applies to banks, brokers in mutual funds, securities, future commissions, finance merchants, and businesses that handle financial transactions on behalf of customers. The Patriot Act requires strict KYC rules, which includes a Customer Identification Program and CDD. The purpose of CDD is simple, yet extremely important: It deters and prevents financial crimes that can be a risk to your business. There are several components and types of CDD:

  • Customer Identification and verification (Having the customer fill out a form with their basic information such as name, birth date, address, and ID number);
  • Understanding the nature and purpose of the customer’s business;
  • In May 2018, FinCEN issued the rule of Beneficial ownership identification and verification which requires additional CDD about who is the ultimate owner or beneficiary of a business;
  • On January 1, 2024, the new beneficial ownership rule, issued by FinCEN, will take effect which will implement reporting requirements under the Corporate Transparency Act of 2021, the Anti-Money Laundering Act of 2020, and the National Defense Authorization Act of 2021. FinCEN defines a beneficial owner as an individual that, either directly or indirectly, has a significant ownership interest in a company;
  • Ongoing monitoring for suspicious activities.    

There are several types of layers for CDD, and the most common are: Standard, Simplified, and Enhanced.

  • Standard involves identifying a customer through reliable independent sources.
  • Simplified is when a customer’s risk assessment has proven to have a low potential for financial crimes.
  • Enhanced applies when the risk of financial crimes is high, such as a politically exposed person or a high-risk nation.

In a nutshell, CDD is taking steps to identify customers and checking who they say they are. As you can see, the initial CDD onboarding process is very important and sets the stage for Enhanced Due Diligence. EDD are additional checks to minimize risk exposure, violations of regulatory compliance and, like with CDD, to prevent financial crimes arising from money laundering and terrorism financing. EDD is distinguished from CDD by the following features:

  • It’s more rigorous and robust  and requires significantly more evidence and detailed information.
  • Reasonable assurance: EDD should provide assurance when calculating KYC risks.
  • Detailed documentation: Scrutiny of reliability should be weighted on how data is captured and validated.

EDD arises when the risk associated with a customer or transaction is higher than usual. Take for example a customer’s occupation, nature of the business, or the types of the transactions. EDD minimizes exposure to your business, violations of regulatory compliance, and may prevent financial crimes (such as money laundering and terrorist financing).Let’s take a look at high risk customer and business types that may require EDD:

  • Customers linked to high-risk countries such as Politically Exposed Persons and High-Risk Third World Countries. Some countries pose a higher level of money laundering risk than others due to deficiencies in their anti-money laundering programs.
  • Customers with links to high-risk business sectors or high-risk purchases. Nail salons with suspicious high earnings, laundromats, large purchases of art, automobiles, and properties.
  • Customers with complex ownership structures can be a red flag because they can be created to hide illegal proceeds. It, then, becomes important to identify the ultimate owner or beneficiary.
  • Customers with unusual account activity. If after CDD onboarding a customer starts depositing large amounts of cash, transferring funds regularly to another country, or starts sending money to high-risk individuals - that is a possible red flag.
  • Customers with adverse media reputation.
  • Unusual, non transparent, or excessively complex beneficial ownership structure.
  • Payment received from unknown or unassociated third parties.

What can a business do with high risk customers or businesses?

  • Training staff on what to be aware off is critical.
  • Maintaining thorough records of customer information, transactions, and risk assessment.
  • Regularly review and update procedures to ensure compliance with evolving regulations and industry best practices.

CDD and EDD comes down to your customer’s risk profile, obtaining information where necessary, conducting background checks and monitoring transactions, organizing and securing data in line with compliance standards, and keeping the data for regulators. In conclusion, CDD and EDD are essential tools in the fight against financial crimes. By understanding their importance and implementing effective measures, businesses can protect themselves and the U.S. financial system. Comprehensive CDD and EDD compliance can protect businesses from reputational damage, financial losses, and ensures compliance with regulatory requirements. Non-compliance can lead to hefty fines, legal penalties, and reputational harm. Additional information can be found in the FFIEC Manual under Regulatory Requirements. Thank you for watching.

The information on the site is provided in good faith and strictly for educational purposes and does not amount to professional service or legal advice. While the information on this video is about laws, regulations, and procedures, the information is intended for educational purposes and not legal advice.