Moody's defines it as the procedure by which banks and other financial institutions (FIs) verify the identities of potential clients before bringing them on board and keep an ongoing risk assessment going forward. This careful process is necessary to prevent terrorist groups and criminals from taking advantage of the financial system, as well as to comprehend and manage the bank's complete client risk base.

Identity verification by paperwork or data checks and a thorough risk assessment, carried out both during the initial onboarding process and on a regular basis during the customer's lifecycle, are included in CDD. This guarantees continuous monitoring for any alterations in the risk profile of the client or possible illegal activity. The procedure is essential to risk mitigation because it makes sure that dishonest people can't access or abuse the established financial system. The International Monetary Fund (IMF) asserts that stopping, identifying, and prosecuting the illegal movement of funds and the funding of terrorism require an efficient framework for counter-financing of terrorism (CFT) and anti-money laundering (AML).

Fundamentally, the goal of CDD is to provide an open and honest communication channel between financial institutions and their clients. This is accomplished by doing thorough KYC and AML data checks, grading clients according to risk levels ranging from low to high, and helping banks make well-informed decisions on customer onboarding, offboarding, and ongoing monitoring. As evidenced by the billion-dollar fines levied in 2023, breaking AML legislation can result in serious consequences. This emphasizes the significance of a comprehensive CDD procedure.

While CDD regulations differ from one jurisdiction to the next, they are all based on four basic principles: establishing and confirming the identity of customers, comprehending the goal of customer connections in order to create risk profiles, and continuously keeping an eye out for suspicious activity. While AML directives are amended on a regular basis in the EU, compliance with CDD is required in the UK under anti-money laundering legislation supervised by the Financial Conduct Authority (FCA). With 36 member governments, the Financial Action Task Force (FATF) offers a thorough framework for preventing money laundering and the funding of terrorism.

Technology has completely changed CDD procedures, replacing manual checks with automated technologies that expedite risk assessments and data checks. By combining data checks with top information sources and utilizing regulatory technology (RegTech) to improve the effectiveness and dependability of CDD procedures, Moody's KYC solutions serve as an excellent example of this shift. These automated checks facilitate a more dynamic and safe approach to customer due diligence by covering a wide range of parameters such as geocoding, PEPs, sanctions screening, and electronic identity verification.

The significance of CDD in maintaining regulatory compliance and protecting against financial crime is becoming more and more important as the economy changes. Moody's offers automation and RegTech solutions that not only speed up the CDD process but also give financial institutions the tools they need to confidently traverse the intricacies of the contemporary financial system.