Customer Due Diligence: What Is It and How It Works

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Updated: 28/01/25

7 Mins Read

Customer Due Diligence (CDD): What It Is & How to Perform It

Customer Due Diligence (CDD) has become a cornerstone of regulatory compliance and fraud prevention in 2025. As financial crime grows more sophisticated, businesses are under increasing pressure to verify customer identities and monitor risk throughout the customer lifecycle.

Fraud losses jumped to $12.5 billion in 2024 — a 25% rise from the year before — showing just how quickly fraud tactics are evolving. At the same time, 75% of companies now see customer due diligence (CDD) as a top compliance priority.

In this guide, we’ll cover how fraudsters bypass KYC checks, where common gaps appear, and how using alternative data can help spot and stop suspicious activity. But first, a quick refresher on the key concepts.

What Is Customer Due Diligence?

Customer due diligence (CDD) is the process of verifying a customer’s identity and evaluating their risk level before doing business with them. It’s a key part of anti-money laundering (AML) and know your customer (KYC) regulations.

CDD involves collecting, verifying, and analyzing information from various sources, such as:

Customer-provided information – such as name, address, and a valid government-issued ID
Sanctions and watchlist screening – to ensure the customer isn’t flagged by regulatory authorities
Public and private data checks – to understand the customer’s financial behavior, business activity, and risk exposure

The amount of information required depends on the customer’s risk profile, with higher-risk individuals requiring more in-depth checks.

Types of CDD

The different types of customer due diligence (CDD) are simplified, standard, and enhanced, each tailored to a customer’s risk level. Standard due diligence involves identifying and verifying customer identities, which is sufficient for most cases. Simplified due diligence (SDD) is used for low-risk customers and requires only basic identification.

For high-risk customers, such as politically exposed persons (PEPs) or those in high-risk industries, enhanced due diligence (EDD) is necessary. In these cases, standard CDD is not sufficient to address the increased risk. EDD involves a more thorough investigation, including background checks, deeper scrutiny of the customer’s source of funds, detailed analysis of their business transactions, and more frequent transaction monitoring. These additional measures ensure compliance and help businesses manage risks effectively.

Why Is CDD Important?

Customer due diligence (CDD) is a legal requirement in many industries, especially for banks and fintech companies. It plays a key role in helping organizations:

Prevent financial crimes like money laundering and fraud.
Meet compliance standards outlined in AML regulations and FATF guidelines.
Avoid fines and other penalties for failing to comply with laws.

By using identity verification, digital footprint analysis, and alternative data, businesses can manage risks effectively while maintaining a secure and compliant operation.

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:

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.

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.

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.

For high-risk customers or flagged activities, deeper checks are performed. This includes scrutinizing the source of funds, business relationships, and transaction history to mitigate potential risks and maintain compliance.

By following these steps, organizations can tailor their CDD efforts to customer risk levels while ensuring regulatory compliance and operational security.

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

Customer Due Diligence for Banks

Under AML and KYC regulations, banks are required to verify customer identity, address, and source of funds. Customer due diligence (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 Enhanced Due Diligence (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.

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:

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.
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.
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.
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.

Customer Due Diligence Solutions

Customer due diligence (CDD) solutions do more than meet regulatory requirements—they help businesses actively prevent fraud and financial crime. By using tools like IP analysis, digital footprint analysis, and pre-screening during onboarding, organizations can flag high-risk users early, especially those from restricted regions or showing suspicious behavior.

Advanced CDD platforms also automate ongoing screening against updated sanctions, PEPs, and financial crime lists. Real-time monitoring for adverse media and unusual transactions helps detect threats quickly without disrupting legitimate users. This allows businesses to scale confidently while maintaining strong compliance and risk controls.

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.

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