CDD (Customer Due Diligence) and EDD (Enhanced Due Diligence) are both crucial processes in Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance, but they differ in scope and intensity. CDD is the standard procedure applied to all customers, while EDD is reserved for high-risk customers or transactions. The key difference is the level of scrutiny and information required.
Understanding CDD and EDD
| Feature | CDD (Customer Due Diligence) | EDD (Enhanced Due Diligence) |
|---|---|---|
| Purpose | Basic identification and verification. | Deeper investigation of high-risk customers and transactions. |
| Scope | All customers. | High-risk customers, transactions, and jurisdictions. |
| Intensity | Standard level of scrutiny. | Enhanced level of scrutiny. |
| Information Required | Identifying customer, verifying identity, understanding normal transaction behavior. | Source of funds, source of wealth, beneficial ownership, transaction purpose. |
| Triggers | Onboarding new customers. | High-risk factors identified (e.g., PEPs, high-risk countries). |
Core Differences Explained
Here's a detailed look at the contrast between CDD and EDD:
CDD (Customer Due Diligence)
- Focus: CDD involves the basic identification and verification of the customer.
- Process: Establishing the true identity of the customer and understanding their normal transaction behavior.
- Objective: To assess the risk associated with a customer and ensure they are who they claim to be.
- Examples:
- Collecting customer name, address, date of birth.
- Verifying identity using government-issued identification.
- Understanding the nature of the customer's business.
EDD (Enhanced Due Diligence)
- Focus: EDD goes beyond basic identification and verification.
- Process: Gathering additional information to assess and mitigate the higher risk presented by certain customers or transactions.
- Objective: To gain a deeper understanding of the customer's activities and sources of funds to detect and prevent money laundering, terrorist financing, and other illicit activities.
- Examples:
- Investigating the source of funds and wealth.
- Scrutinizing the beneficial ownership structure.
- Monitoring transactions more frequently and closely.
When to Apply EDD
EDD is typically required when dealing with:
- Politically Exposed Persons (PEPs): Individuals who hold prominent public functions.
- High-Risk Jurisdictions: Countries with known issues of corruption, money laundering, or terrorist financing.
- Certain Industries: Businesses with a higher risk of illicit activities, such as casinos or arms dealers.
- Unusual Transaction Patterns: Transactions that are inconsistent with the customer's known business or financial profile.
Practical Insights and Solutions
- Risk-Based Approach: Implement a risk-based approach to KYC/AML compliance, focusing resources on high-risk areas.
- Technology Solutions: Utilize technology solutions such as automated KYC platforms to streamline CDD and EDD processes.
- Continuous Monitoring: Continuously monitor customer activity to detect any changes in risk profile.
- Training: Provide regular training to staff on CDD and EDD requirements and best practices.
