What’s the difference between CDD and EDD?

In financial compliance, Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are not just acronyms but crucial components of an institution's defence against financial crime. As the financial world becomes increasingly interconnected, the need for stringent measures to combat money laundering, fraud, and other illicit activities has never been greater.

Customer Due Diligence (CDD):

CDD is the foundational layer of risk assessment that financial institutions perform when onboarding new customers. It involves collecting and verifying basic customer information, such as their identity, address, and date of birth. This process helps institutions clearly understand who their customers are and categorise their risk profiles into low, medium, or high.

For instance, opening a personal savings account would typically require standard CDD, where the institution verifies the customer's identity through documents like a driver's license or passport.

Enhanced Due Diligence (EDD):

While CDD lays the groundwork, EDD takes a more comprehensive approach to risk assessment. It is typically employed for higher-risk customers or when certain red flags are identified during CDD. EDD involves a deeper dive into the customer's background, transactions, and source of funds. The aim is to gather a more nuanced view of the customer's financial activities and accurately assess potential risks.

For example, EDD would be applied if a bank is dealing with a politically exposed person (PEP) or a customer involved in international business transactions. EDD might include scrutinising the customer's business connections, wealth source, and financial behaviour more closely.

The Crucial Distinctions:

The primary difference between CDD and EDD lies in the depth of scrutiny and the circumstances triggering their application. CDD is a standard procedure for all customers, ensuring a baseline level of security. In contrast, EDD is a specialised, risk-based approach employed selectively.

Understanding these distinctions is vital for financial institutions. While CDD provides a solid foundation for risk assessment, EDD acts as an additional layer of defence for high-risk scenarios. Effectively implementing CDD and EDD ensures that institutions can identify and mitigate financial risks while complying with regulatory requirements.

CDD and EDD are essential tools in the fight against financial crime. They empower financial institutions to know their customers, assess their risk levels, and maintain the integrity of the global financial system. By comprehending the nuances between CDD and EDD, institutions can establish robust compliance frameworks that protect them from potential threats while fostering customer trust and security.