Banks and financial institutions don’t conduct the same kind of verification process to the each entity or individual. As any lack can result in money laundering, and terrorist financing and other fraud. The financial institution apply the due dilligence according to the risk level of customer. These due diligence process are SDD, CDD, and EDD. Here in this guide, you will learn about the Simple Due Diligence in details as well as CDD and EDD and when they are applied.

The Three Levels of Due Diligence

A customer usually starts at the level that matches their initial risk assessment. If ongoing monitoring reveals new risk factors, the institution moves them up a level.

• SDD is a lighter set of checks for low-risk customers.
• CDD (also called standard due diligence) is the baseline process for most customers.
• EDD is an in-depth investigation for high-risk customers.

What is the Customer Due Diligence CDD process?

CDD in Banking is used in Financial Institutions to verify the authenticity of customers. Its main aim is to find risks of illegal activities and money laundering fraud. Kindly read below to learn the steps.

• Gathering Individual Information: The first step of Customer Due Diligence is collecting basic information about the person, such as name, address, DOB, ID, etc.

• Identity Verification: After collecting information, the IDs are checked properly with the government database sources. Whether the person is the same that he is claiming or not. Identity verification is a crucial step in CDD for preventing Identity thefts.

Usually, banks and organizations use APIs to verify the authenticity of a person. To prevent identity theft, organizations use Aadhaar Verification API, PAN verification API, Address Verification API, etc.

• Keeping an Eye on Financial Transactions: This step involves learning the pattern and purpose of the transaction. Monitoring the transactions of customers helps find illicit transactions. This step is important to find illegal fund transfers to high-risk countries and accounts.

• Asses Risk: Customer due diligence helps to find high-risk customers and conduct enhanced due diligence. Here enhanced due diligence will further interrogate the customer.

• Ongoing Monitoring: Ongoing monitoring is the must to do a thing to find suspicious behavior and activities. 

• Record Keeping: Maintaining proper records that contain each step from collecting information, to verification, monitoring etc. These records help in future reference and regulatory compliance.

What Is SDD?

The full form in Banking is Simplified Due Diligence procedure. SDD comes under the Customer Due diligence practice in KYC. Financial institutions like banks use this process to verify the customer’s identity and check the customer risk level. It conducts on the customers who are at least at risk of being involved in money laundering and terrorist funding.

 

SDD check the authenticity of a person by verifying official identity cards. It checks the nature of the transaction and the source of money. Simplified Due Diligence helps banks to use resources and time on high-risk customers.

 

SDD is a simple and easy process, however, the banks need to keep an eye on each customer. Ongoing monitoring will help the bank to detect strange behaviors and keep the financial system secure.

When is SDD Used?

SDD is appropriate only when a documented risk assessment supports it. Common examples include:

• Low-risk entities: Government bodies and publicly listed companies, which already face strict disclosure rules.
• Low-value transactions: Small transactions that carry limited risk.
• Customers with Clean Histories: Existing customers with no sign of suspicious activity.
• Low-risk jurisdictions: Industries such as utilities and retail, which have a lower exposure to money laundering.

If the monitoring reveals suspicious behaviour or new risk factors, the institution must stop applying SDD and move the customer to EDD.

What is Enhanced Due Diligence (EDD)?

EDD (Enhanced Due Diligence) is an advanced customer verification process to check customers who are at higher risk of money laundering, fraud, or other financial crimes.

 

It involves conducting additional checks to understand a customer’s financial background, source of funds, source of wealth, and business activities.

• Verifying the source of funds and wealth
• Screening customers for PEP status and adverse media
• Identifying ultimate beneficial owners
• Conducting enhanced transaction monitoring

Conclusion

SDD, CDD, and EDD are different levels of customer due diligence applied based on the risk a customer poses. Low-risk customers require simplified checks (SDD), most customers undergo standard checks (CDD), while high-risk customers require more detailed checks (EDD). However, every customer must be monitored regularly, and if any suspicious activity or new risk arises, the bank must increase the level of due diligence accordingly. This risk-based approach helps financial institutions prevent money laundering and other financial crimes.

FAQs

Ques: What is the difference between SDD, CDD, and EDD?

Ans: SDD (Simplified Due Diligence): It is a customer verification process applied to low-risk customers.

 

CDD (Customer Due Diligence): Standard procedure to identify and verify customers, understand their financial activities, and assess their financial activities and assess their risk profiles.

 

EDD (Enhanced Due Diligence): Additional checks applied to high-risk customers, such as PEPs, or customers associated with high-risk jurisdictions.

Ques: Why is ongoing monitoring described as a must-do in due diligence?

Ans: Ongoing monitoring helps banks identify unusual transactions, detect suspicious financial activities, and recognise changes in customer risk profiles. It ensures that customer transactions remain consistent with the bank’s knowledge of the customer.

 

Ques: What is transaction monitoring in AML compliance?

Ans: It refers to the ongoing process that involves keeping an eye on customer financial activities, including withdrawals, wire transfers, deposits, etc.

 

Ques: Is SDD applicable to international customers and cross-border transactions?

Ans: It may be applicable, but international customers and cross-border transactions require careful assessment of jurisdictional, sanctions, geographic, and transaction-related risks.

 

Ques: Does Simplified Due Diligence apply to both individuals and businesses?

Ans: Yes, Simplified Due Diligence (SDD) can be applied to both individuals and businesses if they are considered low-risk customers.