KYC (Know Your Customer) and CDD (Customer Due Diligence) are closely related concepts in financial regulation, with CDD essentially being the practical application of KYC principles. Think of KYC as the overall framework, and CDD as the specific actions taken within that framework.
Understanding KYC
KYC, or Know Your Customer, refers to the process that financial institutions and other regulated companies use to verify the identity of their customers and assess their suitability, along with potential risks of illicit intentions for establishing a business relationship. It's a crucial part of anti-money laundering (AML) and counter-terrorist financing (CTF) efforts.
Key aspects of KYC include:
- Customer Identification Program (CIP): Establishing and maintaining procedures to verify the identity of each customer.
- Customer Risk Profiling: Assessing the risk associated with each customer based on factors such as location, business activity, and transaction history.
- Ongoing Monitoring: Continuously monitoring customer activity for suspicious transactions or changes in risk profile.
Understanding CDD
CDD, or Customer Due Diligence, is the process of gathering information about a customer to understand the nature and purpose of their relationship with the financial institution. It involves identifying and verifying the customer's identity, understanding the customer's business and risk profile, and conducting ongoing monitoring of the customer's transactions. CDD is the how to KYC's what and why.
CDD usually involves the following:
- Identifying the customer: Collecting information such as name, address, date of birth, and government-issued identification.
- Verifying the customer's identity: Using reliable and independent sources to confirm the information provided by the customer.
- Understanding the nature and purpose of the customer relationship: Determining the customer's business activities, expected transaction volume, and the reason for opening the account.
- Ongoing monitoring: Regularly reviewing the customer's transactions to identify any suspicious activity.
The Relationship Between KYC and CDD
As highlighted in the initial reference, CDD is integral to KYC. You can't effectively "know your customer" without performing due diligence. CDD provides the practical steps and information needed to fulfill the requirements of KYC regulations.
| Feature | KYC (Know Your Customer) | CDD (Customer Due Diligence) |
|---|---|---|
| Definition | The overarching regulatory framework. | The specific procedures for implementing KYC. |
| Focus | Establishing customer identity and assessing risk. | Gathering and verifying customer information. |
| Scope | Broad, encompassing all aspects of customer management. | Narrow, focused on information gathering and risk assessment. |
| Example | Having a policy to verify customer identities. | Collecting copies of passports and utility bills to verify ID. |
Conclusion
In short, KYC is the regulatory requirement to know your customer, while CDD is the process of gathering and verifying customer information to meet KYC obligations. CDD is the practical, hands-on component of KYC.
