Customer Due Diligence and KYC for Trade Customers
What CDD requires
Identify the customer and verify identity using reliable, independent sources; identify the beneficial owner (typically the natural person who ultimately owns or controls a defined percentage, commonly 25% or more, or exercises control); understand the purpose and intended nature of the relationship; and conduct ongoing due diligence. Enhanced due diligence applies to higher-risk situations: PEPs, high-risk jurisdictions, complex ownership structures, and unusual trade profiles.
Trade-specific CDD
For trade customers, CDD must go beyond identity. You need to understand what they trade, with whom, on what routes, at what scale, and through which banks. A mismatch between stated business and observed activity is a core indicator. For letters of credit, understand the roles: applicant, beneficiary, issuing bank, advising bank, confirming bank, and the correspondent chain. Related-party trade and third-party payments deserve scrutiny.
PEPs and ownership
A politically exposed person, or a family member or close associate, triggers enhanced measures - senior management approval, source of wealth and source of funds checks, and enhanced monitoring. Note that the PEP definition generally does not end immediately when the person leaves office; risk-based continued treatment applies.
Traps
- Assuming the beneficial owner is the named director or the largest single shareholder without tracing the ownership chain.
- Confusing source of funds (where the money for this transaction came from) with source of wealth (how the person's overall wealth was built).
- Believing CDD is complete once onboarding is done - it is ongoing and event-driven.
Rule of thumb
If you cannot explain why this customer is doing this trade, with this counterparty, at this scale, CDD is incomplete regardless of how many documents you hold.
Worked example: A newly onboarded customer states it trades electronics, but its first transaction is a large agricultural commodity shipment to a jurisdiction unrelated to its stated markets, paid by an unrelated third party. Escalate: business profile mismatch plus third-party payment.