Customer Due Diligence (CDD): Comprehensive Guide for 2025

Customer Due Diligence (CDD) is the process of verifying a customer’s identity and assessing their risk profile to prevent fraud and financial crime. Besides monetary losses, fraud and money laundering can severely damage an organization’s reputation and erode customer trust, raising the pressure on businesses to perform thorough identity checks and risk assessments.

In 2024 alone, fraud losses hit $12.5 billion—a 25% increase from the previous year—prompting 75% of companies to place CDD as a top compliance priority. This guide explores how fraudsters bypass KYC, common gaps in due diligence, and how alternative data can help detect suspicious activity.

Key Takeaways

  • CDD is the process of verifying identity and assessing customer risk before and during a business relationship.
  • Regulatory bodies such as the FATF, AMLA, FinCen and FCA require businesses to use a risk-based approach to CDD.
  • There are three levels of CDD based on the associated risk: Simplified, Standard and Enhanced.
  • CDD requirements include customer identification, beneficial ownership checks, risk profiling and ongoing monitoring.
  • SEON enhances CDD by using digital footprint analysis and behavioral data, helping companies cut fraud and boost onboarding accuracy.

What Is Customer Due Diligence?

Customer Due Diligence (CDD) is a core compliance practice used by financial institutions, fintechs, and other regulated businesses to confirm who their customers are and understand the potential risks they pose. At its simplest, CDD is the structured process of gathering reliable information about a customer and evaluating that information to judge whether doing business with them could expose the organization to money laundering, fraud, or other financial crime.

Unlike basic customer onboarding, CDD emphasizes both identity verification and risk evaluation. It draws on official documents, sanctions lists, and other trusted data sources to create a clear picture of an individual or business. Importantly, CDD doesn’t end once the account is opened—it is designed as a continuous process, with monitoring in place to capture changes in customer behavior or status that might increase risk over time.

Types of CDD

CDD procedures can be categorized into three levels—Simplified, Standard, and Enhanced Due Diligence (EDD)—based on the customer’s risk profile:

  • Simplified Due Diligence (SDD): Involves minimal information checks and is generally applied to low-risk customers, such as publicly listed companies, government agencies and individuals with low-value financial products, like basic savings accounts. However, If a customer’s behavior changes—for example, if they begin making irregular or unusually large deposits—their risk level changes and they must be moves to a higher due diligence category.
  • Standard Due Diligence: The baseline approach for most customers, focused on verifying identity and understanding basic financial background.
  • Enhanced Due Diligence (EDD): Necessary for high-risk individuals (e.g., politically exposed persons or those in high-risk industries). This includes deeper investigations into the source of funds, business relationships, and ongoing transaction monitoring.

EDD provides an extra layer of protection for businesses dealing with elevated risk scenarios and ensures stronger compliance with regulatory expectations.

Understand the Key Differences Between CDD and EDD

Dive deeper into enhanced due diligence (EDD) and see how it differs from standard CDD. Learn why EDD is crucial for managing high-risk customers and ensuring compliance.

CDD vs EDD

Why Is CDD Important?

Customer due diligence (CDD) is a legal requirement in many industries, especially for banks and For banks, fintech platforms, and financial service providers, strong CDD practices are essential. They help:

  • Detect and prevent fraud, money laundering, and terrorist financing
  • Stay compliant with AML laws and FATF guidelines
  • Avoid significant penalties and reputational damage

By incorporating tools like identity verification, digital footprint analysis, and alternative data sources, businesses can more effectively manage risk while maintaining smooth onboarding and compliance workflows.

Customer Due Diligence Requirements

Customer due diligence (CDD) is essential for organizations like banks, fintech companies, and investment firms to manage risks and comply with regulations. Here are the four key requirements involved:

1. Customer Identification

When starting a business relationship or conducting significant transactions, organizations must verify a customer’s identity using official documents like passports or driver’s licenses. This ensures compliance with anti-money laundering (AML) regulations and helps flag high-risk individuals, such as those on PEP or sanctions lists.

2. Beneficial Ownership Verification

Identifying who ultimately owns or controls a business is a requirement under FATF and EU AML Directives. This step helps uncover hidden risks by ensuring transparency and reducing the likelihood that criminals will misuse legal entities for money laundering or terrorist financing. By confirming the individuals behind a company, organizations gain a clearer picture of potential threats and strengthen their compliance.

3. Ongoing Monitoring

Regular customer reviews are essential for keeping records accurate and detecting potential fraud. These ongoing checks involve monitoring transaction history, reviewing updated personal information and identifying any discrepancies or unusual behavior that could signal a risk. By continuously validating customer data and activity, organizations can stay compliant with AML regulations and respond quickly to emerging threats.

4. Risk Profiling

Organizations assign each customer a risk level, typically categorized as low, medium or high, based on several factors, including transaction patterns, geographic location, source of funds and results from AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism) checks.

Even customers classified as low risk must still undergo identity verification and profiling. This ensures compliance with regulatory requirements and supports proactive risk management by helping businesses detect unusual activity early, monitor behavior over time and adapt due diligence efforts as needed.

Customer Due Diligence for Banks

Under AML and KYC regulations, such as the AMLA and AMLds, banks are required to verify customer identity, address and source of funds. CDD helps prevent financial crime, ensures compliance, and supports effective risk management.

Banks use a risk-based approach to tailor CDD efforts based on a customer’s profile. High-risk individuals require EDD, including deeper background checks. CDD is an ongoing process involving continuous monitoring to detect and report suspicious activity—critical for maintaining compliance and protecting the financial system. Banks also perform sanctions screening, beneficial ownership checks, customer data updates, transaction monitoring and regular reassessment of risk profiles.

Onboarding Risk Reduction in Digital Banking

Discover best practices with our free guide to reduce onboarding risks and stay AML/KYC compliant.

Download guide

Steps to Perform Customer Due Diligence

Customer due diligence (CDD) is a legal requirement that applies to new business relationships, high-value transactions, money laundering suspicions, or cases involving unreliable documentation. Here’s how to carry it out effectively:

  1. Verify the customer’s identity: Confirm the customer’s identity using official documents and digital verification tools. This step is crucial for KYC compliance and helps ensure the person or business is legitimate.
  2. Assess financial and risk information: Review the customer’s financial background, source of funds, and business activity. High-risk customers may need deeper checks based on transaction value or potential red flags.
  3. Monitor and update customer records: Keep customer data up to date, especially after major changes like new ownership or business structure. Store CDD records securely and review them regularly for accuracy.
  4. Use technology for ongoing monitoring: Leverage tools like open banking APIs, email and device fingerprinting, and IP analysis to detect suspicious behavior and reduce risk. Continuous monitoring helps spot fraud early and stay AML compliant.

By combining traditional methods with modern technology, businesses can effectively manage risk, prevent financial crimes, and meet AML regulatory requirements.

Strengthen CDD With The Right Tools

Effective CDD requires more than box-ticking — it demands tools that adapt to evolving risks across the customer lifecycle.

SEON delivers a unified, real-time approach to AML compliance by embedding identity verification, fraud prevention and risk detection into every stage of the customer journey. From the very first interaction, pre-KYC checks powered by digital footprint analysis and device intelligence validate identities before official documents are even collected. This helps spot synthetic identities and high-risk users early, reducing onboarding risk without unnecessary friction.

As users engage, behavioral biometrics and transaction monitoring allow SEON’s system to analyze patterns in how, when and where funds are moved. This continuous profiling helps distinguish legitimate users from suspicious activity, empowering teams to act on risk, not noise.

On top of this, SEON enables real-time screening for PEPs, sanctions lists and adverse media, making compliance and risk management an integrated, ongoing effort rather than a one-off task.

With SEON, organizations strengthen CDD by detecting fraud before it happens, safeguarding regulatory compliance and maintaining customer trust.

Frequently Asked Questions

What is a due diligence checklist?

A due diligence checklist is a series of steps your organization must complete to ensure it remains legally compliant. The checklist steps may vary from one industry to the next, but they always include some form of identity and financial information verification.

What are the four customer due diligence requirements?

Customer due diligence requirements vary from one industry to another, however, you will commonly find that a business must establish a user’s: 1) identity, 2) financial information, 3) residential address, 4) money-laundering risk.

Sources

  • Thales Group: Annual Report Ebook
  • Identity Force: What Are the Odds of Getting Your Identity Stolen?
  • CNBC: 25% of households are either banked or unbanked