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Customer Due Diligence (CDD) definition and meaning | AML glossary

What is Customer Due Diligence (CDD)? Definition and AML compliance meaning.

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Customer Due Diligence (CDD) definition: What it means in AML compliance.

Customer Due Diligence (CDD) is the backbone of Anti-Money Laundering (AML) compliance. It’s how financial institutions, regulated businesses, and other obligated firms check that their customers are who they say they are and assess the risk they pose.

At its core, CDD is about gathering and verifying customer information to detect signs of financial crime. This means collecting details like a customer’s name, date of birth, and address, but also going deeper – understanding their source of funds, nature of their business, and expected transactions. Done properly, it stops criminals from using legitimate businesses to launder money or finance terrorism.

It’s a legal requirement for businesses covered by AML regulations, from banks and payment providers to law firms and estate agents. Failing to carry it out properly can lead to heavy fines, reputational damage, and even criminal liability. CDD is a tool to protect businesses from being exploited by criminals.

The process typically includes:

  • Identifying the customer: This means verifying their identity using reliable documents, such as a passport or driving licence, or electronic verification systems.

  • Understanding the purpose of the relationship: Businesses need to assess why the customer is using their services and what kind of activity they should expect to see.

  • Assessing the risk: Some customers pose a higher risk than others. If there are red flags – such as links to high-risk countries, complex company structures, or unusual transactions – further checks are needed.

Customer Due Diligence (CDD) meaning

“CDD can reduce and mitigate many of the risks that businesses must monitor and manage, primarily those involving fraud and financial crime. And by detecting these fraud risks early on, organisations can save themselves significant amounts of money.”

Thomson Reuters

Customer due diligence (CDD): An overview

Why Customer Due Diligence (CDD) matters for compliance teams.

For AML compliance professionals, CDD is a key defence against financial crime. When done well, it stops illicit funds from entering the financial system and flags suspicious activity before it becomes a bigger issue.

One of the biggest challenges in CDD is finding the right balance. Too little scrutiny exposes businesses to risk, while excessive checks frustrate customers. Using a risk-based approach helps focus resources where they are most needed, ensuring that low-risk customers are processed quickly while high-risk ones get the attention they require.

Technology plays a big role here. Automated identity verification, AML watchlist screening, and ongoing monitoring can help streamline CDD while improving accuracy. But technology isn’t a replacement for human judgement – compliance teams still need to assess risk and spot red flags that automated systems might miss.

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