KYC and CDD: A Complete Guide
In the financial world, banks, financial institutions, and businesses follow strict procedures to ensure legal compliance and minimize financial risks. Two of the most important processes in this regard are KYC (Know Your Customer) and CDD (Customer Due Diligence). Although they are often used interchangeably, they have distinct purposes and levels of scrutiny.
What is KYC?
KYC, or Know Your Customer, is a regulatory and financial process designed to verify the identity of customers. It is a fundamental step to ensure that the customer is legitimate and eligible to use financial services.
Purpose of KYC
- Identity Verification: Confirms that the customer is who they claim to be.
- Fraud Prevention: Helps protect institutions from fraudulent activities and scams.
- Regulatory Compliance: Ensures adherence to financial regulations and anti-money laundering (AML) laws.
- Financial Security: Prevents illegal or suspicious financial transactions.
Information Collected During KYC
- Full name
- Date of birth
- Government-issued ID (passport, national ID card)
- Residential address
- Source of income or financial background
What is CDD?
CDD, or Customer Due Diligence, is a more detailed process than KYC. While KYC focuses on verifying identity, CDD assesses the financial and legal background of a customer to identify potential risks.
Purpose of CDD
- Risk Identification: Evaluates customer transactions, income sources, and financial standing.
- Prevent Money Laundering and Terrorism Financing: Detects suspicious activities early.
- Risk Profiling: Categorizes customers into low, medium, or high-risk groups.
- Regulatory Compliance: Ensures the institution follows laws and regulatory requirements.
Steps Involved in CDD
- Verifying the customer’s identity
- Analyzing transaction patterns
- Checking financial and business background
- Continuous monitoring and periodic updates
Key Differences Between KYC and CDD
| Aspect | KYC | CDD |
|---|---|---|
| Meaning | Know Your Customer | Customer Due Diligence |
| Scope | Basic identity verification | Detailed financial and legal risk assessment |
| Objective | Legal compliance and identity verification | Prevent financial crimes and assess risk |
| Process | Collecting identification documents | Analyzing financial background and transaction patterns |
| Implementation | Mandatory for all new customers | Based on customer risk profile (low, medium, high) |
| Monitoring | One-time or periodic updates | Continuous monitoring for high-risk customers |
Summary
- KYC is the first step, aimed at identifying and verifying the customer. It ensures basic legal compliance and helps prevent identity fraud.
- CDD is an extended step that evaluates the customer’s financial behavior and risk level. It focuses on preventing money laundering, fraud, and other financial crimes.
- Both KYC and CDD work together to safeguard financial institutions and maintain trust in the financial system.