What is customer due diligence?
Customer Due Diligence (CDD) is the process by which regulated businesses verify the identity of their customers, understand the nature of their business relationships, and assess the money laundering and terrorist financing risks they pose. CDD is the operational foundation of every AML compliance programme.
The five pillars of CDD
Customer due diligence is usually broken into five parts. Together they establish who the customer is and whether the relationship is safe to take on.
1. Customer identification
Collecting identifying information such as full name, date of birth, address, and nationality. For corporate entities, this includes the entity's legal name, registration number, registered address, and nature of business.
2. Identity verification
Verifying the collected information using reliable, independent sources - government-issued identification documents for individuals, company registry extracts for entities.
3. Beneficial ownership identification
Identifying the beneficial owners of entity customers and verifying their identities using the same standard applied to direct customers.
4. Understanding the business relationship
Assessing the purpose and intended nature of the business relationship to establish a baseline for ongoing monitoring and identify any unusual or suspicious activity.
5. Sanctions screening
Checking all identified parties - customers, beneficial owners, and connected parties - against global sanctions and watchlists. This is where automated screening platforms provide the greatest efficiency gain over manual processes.
When CDD must be performed
Under the UK Money Laundering Regulations 2017 and equivalent EU legislation, CDD must be performed:
- Before establishing a new business relationship
- Before carrying out an occasional transaction above the applicable threshold
- When there is suspicion of money laundering or terrorist financing
- When there are doubts about previously obtained customer identification data
For sector-specific CDD guidance, see our legal professionals, accountants, and real estate industry pages.
CDD vs EDD vs simplified due diligence
CDD is the standard level of checks. Enhanced Due Diligence (EDD) applies to higher-risk situations and requires additional measures. Simplified Due Diligence (SDD) may be applied in clearly lower-risk scenarios, though its availability varies by jurisdiction and the risk-based approach requires documented justification.
Related terms
- EDD - additional measures for higher-risk customers
- Beneficial Owner - identifying the natural person behind an entity
- PEP - politically exposed persons requiring enhanced checks
- AML - the broader compliance framework