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Customer Due Diligence (CDD) is the client investigation used to verify who you are doing business with and the associated integrity risks. A good CDD policy helps you comply with regulations against money laundering and terrorist financing, prevents reputational damage, and is increasingly required by banks. Below, you can read exactly what CDD entails, why you need it, and how to establish a workable CDD policy step by step.
What is Customer Due Diligence (CDD)?
Customer Due Diligence is the process by which a company conducts thorough research into its customers and business relations to determine whether there is a connection to money laundering, terrorist financing, or other unlawful activities. The goal is to identify risks in a timely manner and make them manageable. CDD prevents individuals with malicious intent from hiding behind companies or foundations. In the Netherlands, the Anti-Money Laundering and Counter-Terrorism Financing Act (Wwft) provides the legal framework for this. TODO_VERIFY: check whether additional or amended Wwft obligations apply to your specific sector.
The role of the UBO in CDD
A CDD policy focuses on the UBOs (ultimate beneficial owners): the natural persons behind a company or foundation. Typically, this concerns persons who:
- hold an interest of at least 25% in the capital;
- can exercise at least 25% of the voting rights; or
- be beneficiaries of at least 25% of the assets.
These UBOs are screened for various integrity risks.
What are the components of a CDD policy?
A comprehensive CDD policy includes, in any case:
- Client acceptance: under what conditions you accept a client;
- Identification and verification of clients and their UBOs;
- Determining the purpose and nature of the business relationship;
- Monitoring and review: continuous supervision of clients and transactions.
Why establish a CDD policy?
A CDD policy yields several benefits:
- it helps to identify and manage or reduce risks;
- it prevents reputational and image damage;
- it can limit your liability if money laundering or other unlawful activities are subsequently found to have occurred;
- It is increasingly being made mandatory by banks. Wholesalers are also increasingly having these requirements imposed on them, because banks themselves must comply with strict legal obligations and want to know who the end customer is.
How do you set up a CDD policy?
You build a solid CDD policy step by step, based on a risk-oriented approach:
- Identify the risks. Map out which customers pose an increased risk — for example, customers from a high-risk area or from risk sectors such as the gambling industry — and how you recognize them.
- Develop acceptance, identification, and verification policies. Determine for which customers a thorough investigation is necessary and for which a lighter regime suffices.
- Draw up an action plan. Describe the necessary actions for each risk classification. In some sectors, additional measures or a periodic reassessment are required.
- Establish internal controls. Consider internal audits and (where appropriate) a compliance team that monitors compliance.
- Keep the policy up to date. Risks change constantly; evaluate and update the policy regularly.
Frequently asked questions about CDD
Who is subject to a CDD obligation?
Under the Wwft, customer due diligence applies to various institutions, such as financial service providers, trust offices, accountants, and notaries. In addition, banks are increasingly requiring their business clients to implement a CDD policy as well. TODO_VERIFY: check whether your company falls under the Wwft or is required to conduct CDD through your bank.
What is the difference between CDD and KYC?
KYC (“Know Your Customer”) is the broader term for knowing your customer; CDD is the concrete investigation and management process that gives substance to this. In practice, the terms are often used interchangeably.
Who is the UBO of my company?
The UBO is the natural person who is the ultimate owner of or exercises control, typically through an interest of at least 25% in capital, voting rights, or assets.
What happens if I do not have a CDD policy?
For institutions subject to the Wwft, this can lead to enforcement and sanctions. In addition, you run the risk of reputational damage and termination of the relationship with your bank.
Need help with your CDD policy or due diligence?
A well-thought-out CDD policy prevents many problems, but requires a tailored approach and regular updating. We assist enterprises, trust offices , and their clients with issues surrounding CDD investigations and due diligence.
View our expertise in financial law and corporate law, or schedule a no-obligation intake consultation.
