Many methods used by criminals to launder money or finance terrorism involve leveraging the financial system to transfer funds. Financial institutions, particularly banks, are especially vulnerable to such abuse. To protect themselves, it is essential for financial institutions to implement adequate controls and procedures that enable them to identify the individuals or entities they are dealing with. Proper due diligence on both new and existing customers is a key component of these controls.
The application of strict Customer Due Diligence (CDD) by financial institutions, along with a high degree of transparency, is crucial for effectively combating money laundering and the financing of terrorism. CDD must be applied when establishing a business relationship or preparing for specific cash transactions exceeding a certain threshold. It must also be applied whenever financial institutions suspect money laundering or terrorist financing activities.
The basic steps of CDD measures include properly identifying the customer and/or beneficial owner, verifying their identity, and collecting information about the customer's purpose and the nature of the business relationship.
International standards on CDD have been established by both the Basel Committee on Banking Supervision (Basel Committee) and the Financial Action Task Force (FATF).