Money laundering moves billions a year. Companies and governments incur millions in losses because of this activity. The Customer Due Diligence (CDD) and Know Your Customer (KYC) and processes help mitigate its effects.
Although KYC and CDD have many similarities, they do not refer to the same process. In this article, we will discuss the relationship between both concepts.
What is CDD or due diligence?
Let’s take it from scratch: What is due diligence?
Customer due diligence (CDD) refers to the verification and review of a customer’s information in order to assess their risk profile. This is a tool to combat money laundering. The CDD serves to prevent financial fraud and unveil any risk that may arise in dealing with clients.
CDD allows companies to go beyond “knowing their customers” and focuses on managing potential threats. Each client presents a level of risk according to its context. Therefore, the collection of information varies depending on the client.
How do CDD and KYC relate?
Both CDD and KYC are part of the AML (Anti-Money Laundering) regulatory framework, both concepts feed each other and serve as financial fraud prevention tools.
CDD and KYC arise to control and record suspicious actions.
Despite all the similarities, CDD and KYC are different concepts and act at different stages.
KYC checks are carried out in the first phase of identity verification for new users, that is, just before a user becomes a customer (when establishing the first business relationships and trying to understand what the objectives and interests of the other party are).
On the other hand, the CDD evaluates the data collected during the registration of a new client, checks if it is correct information and measures the risks that this new client may imply for the business. In addition, these controls are carried out continuously throughout the commercial relationship with the client (as their operations change), so it is necessary to keep both their activity and transactions up to date. This allows companies not to let their guard down and always be one step ahead.
- KYC allows the company to create the risk profile of a potential client before it becomes a client.
- CDD determines if the information provided by a client is correct or not.
Therefore, Know Your Customer provides an inventory and Customer Due Diligence helps to verify the information that customers provide, to know if it is truthful.
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