Customer Due Diligence and Identification
Domain 2 tests the mechanics of customer due diligence: when it is triggered, what it must contain, how identity is evidenced, and when a firm must stop rather than proceed. Questions often ask you to choose the next action in a scenario, so know the sequence and the stop points.
CDD triggers and components
CDD is required when establishing a business relationship, carrying out occasional transactions above a threshold (often USD/EUR 15,000), when there is suspicion of ML/TF regardless of amount, or when doubts about previously obtained data arise. Core components are: identify the customer; verify identity using reliable, independent sources; identify the beneficial owner and verify; understand the purpose and intended nature of the relationship; and conduct ongoing monitoring.
Identification versus verification
Identification is collecting data (name, date of birth, address, or for entities name, legal form, incorporation details). Verification is confirming that data against evidence - a government-issued photo ID, a registry extract, a utility bill. Photocopies and self-declared data alone are weak. Non-face-to-face onboarding needs compensating controls such as liveness checks, database cross-checks, or additional documentary evidence. Reliance on third parties is permitted in some regimes, but the firm retains responsibility.
Source of funds and source of wealth
Source of funds is where the specific money comes from; source of wealth is how the customer accumulated overall wealth. They are not interchangeable, and enhanced due diligence usually requires both.
Worked example
A student opens a current account with a foreign passport and a university offer letter. The address on the application is a shared student residence, while the passport shows an overseas address. Correct reasoning: the identity evidence is reliable and independent, but the address discrepancy is unexplained. The officer should request corroboration of the local address, such as a tenancy agreement or confirmation from the university, and document why the overseas address differs. If the customer cannot explain, the firm should not proceed, or should escalate and consider filing a suspicious transaction report.
Traps that cost marks
Accepting a photocopy as verification; treating source of funds and source of wealth as synonyms; continuing onboarding when verification fails; and assuming face-to-face onboarding equals low risk.