Last Updated on October 17, 2025
Customer due diligence (CDD) is how financial institutions check who their customers are and what kind of risk they might bring. It’s a key part of stopping money laundering, terrorist financing, and other financial crimes.
The goal of the diligence process is to collect and verify customer information, understand their business activities, and assign a risk profile based on what’s found. This helps banks and other financial institutions follow regulatory requirements, avoid penalties, and prevent criminals from using their services.
But customer due diligence doesn’t end after customer onboarding. It requires ongoing monitoring, regular updates, and sometimes deeper checks, especially when dealing with higher risk customers. This guide explains how CDD measures work, what to look for, and why diligence is important for strong risk management and financial crime compliance.
What Is Customer Due Diligence (CDD)?
Customer due diligence (CDD) is the process financial institutions use to collect and review information about a customer or potential customer. This includes verifying identities, checking backgrounds, and understanding business activities to ensure the person or business is legitimate and not involved in criminal activity such as money laundering or terrorism financing.
Core steps in CDD include:
- Verifying customer identity using official documents or data sources
- Reviewing background information and understanding business activities
- Assessing the customer’s risk profile to determine if they are low- or high-risk
- Identifying beneficial owners behind companies or accounts
- Following sanctions lists to ensure compliance with AML laws
- Maintaining complete records for regulatory requirements
- Ongoing monitoring to detect unusual transactions or adverse media alerts
CDD is not just a one-time process. Ongoing monitoring ensures that if a customer’s activities change, such as sudden unusual transactions or negative news, the institution can respond quickly.
These measures are required by anti-money laundering (AML) regulations, including the U.S. Bank Secrecy Act and the European Union’s financial crime compliance rules.
Key Goals and Importance of CDD
The main goal of customer due diligence (CDD) is to prevent financial crimes. By learning who a customer is and how they operate, financial institutions can spot and stop money laundering, terrorist financing, and other illicit activity before it happens.
CDD measures also help banks follow regulatory requirements. Laws like the Bank Secrecy Act and AML regulations require companies to know their customers, check for beneficial owners, and report suspicious transactions when needed. Without a strong CDD process, institutions risk heavy fines and loss of trust.
Good CDD processes also improve overall risk management. When banks understand customer risk profiles, they can apply a risk-based approach, giving more attention to higher risk customers like politically exposed persons or people linked to high-risk countries. This focused effort helps protect the entire financial system and strengthens a company’s defense against financial crime.
Core Elements of Customer Due Diligence
Customer due diligence (CDD) helps financial institutions verify who their customers are and assess their risk. The process includes:
- Identifying customers and confirming their identity using official documents
- Verifying beneficial owners for business accounts
- Understanding the customer’s business activities to assign a risk profile
- Using a risk-based approach to apply extra checks for higher risk customers
- Performing ongoing monitoring to spot changes or suspicious activity
- Keeping accurate records of all diligence checks and updates for regulatory compliance
These steps help prevent financial crimes and support strong risk management.
Risk Management and Ongoing Monitoring
Effective customer due diligence (CDD) doesn’t stop after customer onboarding. To manage risk properly, financial institutions must continuously monitor customer activities to make sure their behavior matches their original risk profile.
If a customer begins making unusual transactions, shows up in adverse media, or appears on sanctions lists, their risk level must be reassessed. In some cases, the institution may need to apply enhanced due diligence, especially for higher risk customers like politically exposed persons.
This kind of ongoing monitoring is key to identifying suspicious transactions, updating customer records, and staying compliant with regulatory requirements. Without it, firms may fail to detect illicit activity, opening the door to money laundering, terrorist financing, or other financial crimes.
Regulatory Frameworks and Compliance Requirements
Customer due diligence (CDD) is required by law. Financial institutions must follow rules to stop money laundering, terrorist financing, and other financial crimes.
The Financial Action Task Force (FATF) sets global standards. In the U.S., the Bank Secrecy Act requires identity checks, risk assessments, and ongoing monitoring. Banks must follow written policies, keep records, and report suspicious transactions. In the European Union, AML directives require similar checks, including for beneficial owners and higher risk customers.
Failing to meet these regulatory requirements can lead to fines and legal trouble. Below is a simple breakdown:
CDD Compliance by Region
| Region | Regulation | Key Requirements |
| United States | Bank Secrecy Act (BSA) | Identity checks, risk-based approach, CIP, SARs, ongoing CDD |
| Global | FATF Recommendations | Risk-level checks, beneficial owner ID, screen against sanctions lists |
| European Union | AML Directives (5AMLD, 6AMLD) | Standard/EDD, record keeping, adverse media screening |
CDD checks must follow local and global rules. Compliance protects against illicit activity and keeps institutions aligned with the law.
Enhanced Due Diligence (EDD) for High-Risk Customers
Enhanced due diligence (EDD) is used when a customer poses a greater risk for money laundering, terrorist financing, or other financial crimes. This applies to higher-risk customers such as politically exposed persons (PEPs), businesses in high-risk countries, or those with complex ownership structures.
Key EDD measures include:
- Gathering additional documents beyond standard customer due diligence (CDD)
- Verifying the source of funds and wealth more thoroughly
- Identifying and confirming all beneficial owners in detail
- Performing deeper risk assessments and ongoing monitoring
- Checking for adverse media coverage or red flags during the relationship
- Conducting continuous transaction monitoring for suspicious activity
EDD goes beyond standard CDD, requiring more time, resources, and scrutiny. Under most regulatory requirements, financial institutions must apply EDD when dealing with flagged customers, often involving ongoing reviews and proactive detection of suspicious behavior.
By applying these steps, EDD helps prevent criminals from exploiting the financial system and strengthens compliance in situations with higher inherent risks.
Technology’s Role in Customer Due Diligence
Technology helps financial institutions improve the customer due diligence (CDD) process by reducing manual work, increasing accuracy, and speeding up checks. With the growing need for strong financial crime compliance, automated tools are becoming a core part of any CDD program.
Digital identity verification makes it easier to confirm customer identities during onboarding. Automated systems can cross-check documents, screen against sanctions lists, and detect adverse media in real time. These tools help reduce the risk of errors from manual checks and make the process faster.
Regulatory technology (RegTech) solutions like Moody’s Maxsight™ can pull data from global sources to help with diligence checks, risk assessment, and ongoing monitoring. These systems are also used to track suspicious transactions, update customer information, and manage higher risk cases with less delay.
When well-integrated with an institution’s IT systems, technology supports record keeping, audit readiness, and stronger results across all CDD processes.
Frequently Asked Questions
What is the meaning of customer due diligence?
Customer due diligence (CDD) is the process financial institutions use to verify the identity of a customer, understand their business activities, and assess their risk profile.
What are the three types of customer due diligence?
There are three levels of customer due diligence:
Simplified Due Diligence (SDD): For low risk customers where fewer checks are needed.
Standard CDD: The normal process of identifying the customer, verifying identity, and assessing risk.
Enhanced Due Diligence (EDD): Used for higher risk customers, such as politically exposed persons (PEPs) or clients from high-risk countries.
Each level applies based on the risk basis of the customer relationship.
What is the CDD process in KYC?
In Know Your Customer (KYC), the CDD process involves verifying customer identities, understanding their business activities, checking for beneficial owners, and applying a risk-based approach to manage threats like money laundering or terrorist financing.
Conclusion
Customer due diligence (CDD) is not just a legal requirement, it’s a critical step in helping financial institutions reduce risk, prevent financial crimes, and meet AML regulations. From verifying customer identities to performing ongoing monitoring and identifying higher risk customers, each part of the due diligence process plays a role in protecting the financial system.
Strong CDD programs, backed by technology and a clear risk-based approach, help detect suspicious activity, flag issues early, and ensure compliance with local and global regulatory requirements. Whether you’re screening a potential customer, updating records, or responding to red flags, applying the right level of diligence is essential.
When done right, CDD strengthens customer relationships, builds trust, and keeps both institutions and customers safer from illicit activity.
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Matthew Small is the Vice President of Strategic Sales and Alliances at SmartRoom, where he builds partnerships and leads strategic efforts to deliver cutting-edge virtual data room solutions for dealmakers. With a strong background in enterprise sales and channel development, Matthew is passionate about unlocking new growth opportunities and helping clients navigate complex transactions with greater speed, security, and confidence.
