CDD vs EDD: Know When to Go Beyond Basic Due Diligence

Both customer due diligence (CDD) and enhanced due diligence (EDD) are regulatory requirements that are prerequisites for ensuring AML compliance and help with risk management and mitigation.

These concepts may sound similar, but there is quite a difference between the two, especially if we consider what their individual protocols are, why both practices are required, and when to go for EDD.

Whenever a business develops a relationship with another entity (customer or business), there is a certain level of scrutiny that is mandatory to avoid getting into the risk of dealing with entities prone to violations of AML regulations.

What is Customer Due Diligence (CDD)?

Customer due diligence is one of the integral components of meeting the Know Your Business (KYB) requirements. It is a part of an organization’s risk management strategy required by laws and regulations like the Anti-Money Laundering (AML) and the Bank Secrecy Act (BSA). CDD is typically conducted when establishing a new business relationship, carrying out occasional transactions, or generally when transactions are involved or when there is a suspicion of money laundering. While conducting CDD, financial institutions collect and then verify crucial information about a client.

For example, during business onboarding, implementing CDD as a part of KYB, the following documents of the customer will be collected:

• Full legal/registered name
• Date of birth and a valid picture
• Passport, national ID, and driver’s license
• Contact number and email
• Certificate of incorporation
• Business/trade license
• Tax identification number
• Articles of association
• Proof of registered business address (bill, lease agreements)

After collecting these documents, businesses assess the customer’s risk level. This involves analyzing their financial and business activities.

One of the important steps to note here is that in CDD, the customer data is not only under scrutiny but also extends to checking data against public and government databases, including sanctions lists, company listings, adverse media, and PEP lists.

What is Enhanced Due Diligence (EDD)?

After developing the customer’s risk profile, the risk score that is assigned determines the level of due diligence required. It involves an intense level of scrutiny called enhanced due diligence (EDD). The extent to which due diligence is conducted depends on the customer’s risk level. In usual scenarios, standard CDD is sufficient for basic or low-risk profiles. However, that may not always be the case, as sometimes a UBO, for example, may be a politically exposed person (PEP) or may be an individual from a sanctioned jurisdiction.

Implementing this risk-based strategy enables businesses to safeguard customer relationships and assets and ensure EDD compliance.

CDD vs EDD: When Basic Checks Aren’t Enough

CDD and EDD are both integral components of risk mitigation and AML compliance programs in financial institutions. While both regulatory practices are implemented to avoid the risks associated with the illegitimate customers, the latter differs slightly based on depth, scope, and intent.

Depth:

Contrary to the CDD, which typically involves collecting a customer’s basic data to create a risk profile, EDD digs deeper into the customer’s profile. In businesses where a customer is an ultimate beneficial owner (UBO), enhanced due diligence evaluates the risk associated with them. Ensuring a comprehensive investigation is an essential regulatory requirement, as it peels through the complex ownership structures and helps financial institutions know when a customer’s risk level is higher than usual.

With existing customers who have the potential to become high-risk entities in the future, ongoing monitoring through EDD is also beneficial for avoiding future risk and penalties.

Scope:

In terms of scope, EDD goes beyond basic checks to manage high-risk business persons that may be involved in various types of financial crimes such as money laundering, terrorist financing, or regulatory non-compliance. UBO identification is a non-negotiable thing in enhanced due diligence. The decision to apply EDD or CDD in the context of UBOs lies in their risk level. For example, if a customer is a high-risk politically exposed person (PEP), owns a substantial amount of wealth, or has an intricate financial profile, the business should use EDD to get a full picture of the customer’s historical records and financial activities.

Intent:

Unlike basic due diligence, the intent of EDD is to identify and mitigate high levels of risk by scrutinizing factors such as complex ownership structures, involvement of UBOs, or links to high-risk jurisdictions. In addition to that, since CDD only aims to collect and verify basic customer data, in EDD, detailed documentation of a customer is scrutinized, ultimately helping in the meticulous verification of the company’s integrity.

For example, it not only supports customer onboarding but also enhances supplier chain due diligence for fintechs, by providing comprehensive director checks and screening names against sanctions lists and adverse media, helping them understand the risk associated with their partners.

How The KYB’s Approach to CDD and EDD Can Help Your Business

The KYB facilitates both CDD and EDD processes by offering quick, document-supported evaluations from official registers and non-public databases. For CDD, it allows for business or entity verification, business register checks, license verification, and document acquisition under one roof. Our platform ensures that companies are able to instantly check the validity of an entity before onboarding.

Where EDD is needed, we provide sophisticated features such as financial performance analysis (balance sheets, income statements, and cash flows), Ultimate Beneficial Owners (UBOs) identification, and visualization of intricate ownership structures.

Unlike traditional data sources, The KYB provides a comprehensive due diligence report much faster. This comprises extensive company information, underlying risk indicators, and observations that are usually overlooked in regular verification exercises.

Our platform aims to assist companies and financial institutions in reducing onboarding delays, ensuring AML/CFT compliance, and meeting regulatory requirements across various jurisdictions.

Regardless of whether performing third-party screening, investor due diligence, or adding a new vendor, The KYB allows companies to use the right amount of scrutiny, fueled by validated data sources directly and in real time from the official registry. What this means is that our enhanced due diligence not only digs deep into a business entity’s profile but also checks for direct and indirect sanctions, identifying whether the entity is explicitly listed or associated with a sanctioned individual or organization through ownership, control, or business ties.

Get in touch for a comprehensive, automated CDD and EDD solution tailored to your specific compliance needs. Our services simplify Know Your Business (KYB) checks, helping you stay compliant, reduce onboarding friction, and protect your business from potential risks.