Customer Due Diligence and Know Your Customer
The CDD building blocks
Customer due diligence is the foundation of every AML programme. Candidates must know the four elements: identifying the customer, verifying identity using reliable, independent sources, identifying the beneficial owner, and understanding the purpose and intended nature of the relationship. Ongoing monitoring is the fifth, continuing obligation.
Know the beneficial ownership concept: the natural person(s) who ultimately own or control the customer - commonly a threshold such as 25% ownership, plus control through other means (voting rights, nominee arrangements, senior managing official where no owner can be identified).
Understand when CDD applies: establishing a business relationship, occasional transactions above a threshold, suspicion of money laundering or terrorist financing, and doubts about previously obtained data. Know simplified due diligence (lower risk, documented), standard CDD, and enhanced due diligence (higher risk).
Know the timing rules: CDD should be completed before establishing the relationship, with limited exceptions (e.g., not interrupting normal business, with safeguards and completion shortly after). Know reliance on third parties and outsourcing - the firm retains ultimate responsibility.
Traps and rule of thumb
Common traps: assuming a copy of a passport alone satisfies CDD (it addresses identity, not purpose or beneficial ownership); confusing identification (obtaining data) with verification (corroborating it); and treating corporate customers as low risk without penetrating the ownership structure.
Rule of thumb: for every customer, ask who are they, who really owns or controls them, and what is this relationship for? If any of the three is unanswered, CDD is incomplete.
Worked example: A company is owned 40% by an individual, 35% by a second, and 25% by a third. All three meet a 25% threshold and must be identified and verified as beneficial owners; the company itself is the customer, not the beneficial owner.