The FATF standard (Recommendation 10) describes these elements. Firms apply standard CDD to normal-risk customers, simplified measures to demonstrably low-risk ones, and enhanced due diligence to high-risk ones. CDD is done at onboarding, on a trigger event, and as part of periodic review.
Example
A bank opens an account for a company: it checks the registration documents, identifies the people who own or control it, records what the account is for, and screens all of them.
Where it appears in the exams
This topic is relevant for CAMS, CFCS.
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CDD vs EDD vs simplified due diligence: what each requires and when it applies
Related terms
- Enhanced due diligence (EDD): Enhanced due diligence is the additional scrutiny applied to higher-risk customers, relationships or transactions, beyond standard customer due diligence.
- Know your customer (KYC): Know your customer is the process of verifying who a customer is and understanding their business and risk. In practice it is used as a near-synonym for customer due diligence.
- Beneficial owner: The beneficial owner is the real person who ultimately owns or controls a customer, or on whose behalf a transaction is carried out, even if ownership is held through companies, trusts or nominees.
- Risk-based approach: The risk-based approach means a firm identifies and assesses its own money laundering and terrorist financing risks and applies controls in proportion to them, instead of treating every customer and transaction the same.
Source: FATF Recommendation 10. Independent explanation for study purposes, not legal advice.