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Customer Due Diligence: A Comprehensive Guide for AML/CFT Compliance

Crimes, including identity theft, fraud, money laundering, etc., constantly threaten financial and non-financial institutions. Customers’ data, especially in financial institutions such as banks and crypto exchanges, needs more protection due to surging security threats.

Thus, they should take sufficient measures to secure customers’ databases and shield the organization from becoming a target of potential cyber-financial criminals. For this purpose, the know-your-customer or KYC procedure holds tremendous significance during customer onboarding. Furthermore, customer due diligence is a critical component of the KYC process.

Introduction to Know-Your-Customer Due Diligence

Know-your-customer process refers to customers’ identity verification and is the initial phase of customer onboarding in every organization. Financial institutes are mandated to perform this process before taking customers on board.

They must adopt automated and high-tech systems to ensure a seamless KYC process. The know-your-customer due diligence is the most fundamental process involving customer identity verification. It is essential for assessing the risk potential a customer poses to the organization. Although KYC and customer due diligence are used interchangeably, they vary slightly.

KYC is performed during customer onboarding only, whereas CDD is an ongoing or continuous procedure. It is a part of perpetual KYC and continues throughout the client-organization relationship. CDD is vital for compliance with financial regulations, such as anti-money laundering and counter-terrorism funding laws, established by the state and international bodies.

Customer Due Diligence for Banks

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Potential criminals have devised various ways to commit illicit financial practices because of the opportunities provided by cyberspace. They launder money and fund terrorist groups by hiding their identity or personification through document forgery and identity theft. 

For this reason, customer due diligence is an inevitable process for banks because of the risk of financial crimes committed through them. As mentioned, these measures comprise gathering customers’ information to verify them during onboarding. Customer due diligence for banks entails authenticating the legitimacy and legality of customers. It requires the following customer credentials:

  1. Full name

  2. Date of birth

  3. Residential address

  4. Government-issued documents, including national ID, passport, driver’s license, etc.

  5. Proofs of speech, like utility bills

  6. Other documents, such as tax statements and proof of income source

If the client is a business corporation, the required information in customer due diligence is slightly different. It includes the company’s government-issued documents, such as licenses, that prove its legal identity. Moreover, banks must know the source of funds.

Most significantly, they require the information of the company’s primary beneficiary, the ultimate beneficial owner (UBO). A UBO is a legal entity that owns the business enterprise and is the leading actor in acquiring profits.

Customer Due Diligence in Banking for Robust Risk Assessment:

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Customer due diligence in banking is critical to mitigating financial malpractices like money laundering. As mentioned, banks perform CDD continuously or regularly throughout their client relationship. They periodically update customers’ information, assess transactional records, and identify any deviation in the transaction pattern. 

Customer due diligence enables banks to assess the risk associated with a client or business. The names of individuals or corporations are screened to detect any suspicious financial activity based on their past or present records. Furthermore, banks must know their customers’ income source and track any economic activity anomalies.

Customer Due Diligence Checklist in Crypto Firms

The digital assets and virtual currency industry is booming at a rapid pace. Consequently, it needs to improve in assuring a secure environment for the customers and firms. The security gaps and lack of effective regulation have allowed cyber-financial criminals to commit fraud, identity theft, spoofing, and money laundering.

Therefore, customer due diligence is an indispensable part of the KYC process in crypto platforms to mitigate the risk of financial crimes. The customer due diligence checklist in the crypto industry is presented as follows.

  1. Collection of customers’ information and government-issued documents

  2. ID verification

  3. Transaction monitoring

  4. Enhanced Due Diligence

  5. Crypto wallet screening for AML/CFT compliance

  6. Checking against watchlists

Enhanced Due Diligence: An Advanced CDD Measure

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Customers are verified according to specific parameters. They are checked against global watchlists such as politically exposed persons. PEPs are individuals with an influential public position or political affiliation.

Such persons are more likely to commit corruption, bribery, and money laundering through various means; thus, verifying customers according to this list is essential. Similarly, they are verified according to the lists of sanctioned individuals, groups, and business entities, like gray and black lists of FATF. These measures make up the enhanced due diligence process.

EDD is an advanced step in customer due diligence for an in-depth assessment of a customer’s risk profile. Organizations, particularly financial institutions, assign risk scores to customers based on their threat level.

If a customer or business is suspected of anomalies in its financial activities, it is flagged as highly suspicious or a red flag. Financial organizations continually track their transactions and generate suspicious activity reports (SARs). They inform relevant authorities for further investigation. Hence, enhanced due diligence is critical in mitigating money laundering.


Customer due diligence is mandatory for financial organizations and non-financial sectors. It plays a crucial role in customer verification in the banks, virtual assets, real estate, travel, tourism, and gaming industries. All in all, it is vital in preventing money laundering and illicit financial practices. 

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The Center for Oral Surgery Las Vegas, specializing in Dental Implants. Carlos H. Letelier, M.D., D.M.D., D.D.S.
Alliance Francaise de Los Angeles
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