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CAFP: Customer Due Diligence, Enhanced Due Diligence, and Beneficial Ownership Identification

CAFP · Work through your exam, one topic at a time.

All guide sections

Customer Due Diligence, Enhanced Due Diligence, and Beneficial Ownership Identification

What the exam tests

This domain tests the CDD lifecycle: identifying the customer, verifying identity, identifying beneficial owners, understanding the relationship and monitoring it. EDD questions focus on PEPs, high-risk jurisdictions, complex structures and source of funds/wealth.

Core rules and concepts

  • CDD generally requires: identify the customer and verify identity using reliable, independent sources; identify the beneficial owner and take reasonable steps to verify; understand the purpose and intended nature of the relationship; and conduct ongoing monitoring. Triggers include new relationships, occasional transactions above the applicable threshold (FATF cites USD/EUR 15,000), suspicion, and doubts about previously obtained data.
  • Beneficial ownership means the natural person(s) who ultimately own or control the customer. The common threshold is 25% equity or voting rights, plus control by other means. The US CDD Rule uses 25%; the EU also uses 25%. Trusts, nominees and layered companies require looking through to settlers, trustees, beneficiaries or controllers.
  • EDD applies to higher-risk situations: PEPs, customers in high-risk third countries, correspondent banking, private banking, complex offshore structures and unusually large transactions. Measures include senior management approval, source of funds and source of wealth, enhanced ongoing monitoring and more frequent reviews.
  • A PEP is an individual entrusted with prominent public functions, plus family members and close associates. Risk is not guilt; EDD is required, not automatic rejection.
  • Simplified due diligence may be permitted only after a documented low-risk determination; it never permits skipping beneficial ownership identification.

Worked example

A BVI company applies for an account. Its directors are nominees, and the only disclosed shareholder is another offshore company. The bank traces ownership: one natural person holds 30% and another holds 20% but controls the board. Both are beneficial owners: the 30% holder by the 25% threshold, the 20% holder by control. One is a PEP from a high-risk country. EDD is required: establish source of wealth and source of funds, obtain senior management approval, verify the PEP status, and set enhanced monitoring. If the ownership chain cannot be verified, do not onboard.

Traps that cost marks

Do not equate the account signatory with the beneficial owner. Do not apply the 25% threshold without the control prong. Do not assume EDD is a one-time onboarding step; it drives ongoing monitoring. Do not treat all PEPs as prohibited. Do not accept a self-declaration of ownership without verification.