In this edition of Blanco’s Jargon Buster series, we continue to help you understand the many abbreviations in the financial world. This week we look at a key process: customer due diligence (CDD).
CDD, as you might guess, refers to the process of getting to know your customer. This is important because customers can potentially pose a risk, such as the risk of money laundering, terrorist financing or tax evasion. CDD plays an important role in all kinds of sectors, but the financial sector in particular has a so-called ‘gatekeeper’ function.
CDD obligations can be found in various laws and regulations, such as sanctions legislation and anti-money laundering legislation. Investment firms often also have another CDD obligation, which is based on the MiFID legislation. This law requires a firm to know the customer well in order to see if the products and services offered by the firm are appropriate or suitable for the customer, but this jargon buster will not elaborate on this form of CDD.
What does a CDD process look like?
A CDD process always involves the steps of identifying and verifying the customer (and its representatives and beneficial owners) and gathering sufficient information to determine risk, such as the country of residence, industry in which a customer operates, legal business structure, origin of the assets, whether the customer is a politically exposed person or on a sanctions list, whether there is bad press about the customer, etc. Because the legislation is ‘risk-based’, the firm itself must weigh the risks and determine the required depth of the customer due diligence.
If the customer is accepted by the company after completion of the investigation, the customer must be monitored and the customer file must be reviewed periodically. Specific events can also lead to a review or a different risk classification of the customer, also called an ‘event-driven review’.
Not only customers
Although we have only talked about ‘customers’ so far, CDD is often not just about customers. In fact, you should not only know your customers but also know whom you are doing business with from a broader perspective, such as suppliers, business partners or parties in which you invest.
Look out for our next article to keep busting that financial jargon!