KYC and CDD are two terms that are often used together. KYC leads to CDD in the verification of consumer information. Previous KYC processes have evolved into CDD practices. Previously, the KYC procedure was ineffective in preventing illegal behavior. This resulted in the creation of software that automates the entire procedure. This has aided institutions that conduct many transactions. It is simple to do both real-time and scheduled inspections. Because a customer’s risk profile may change over time, the CDD procedure should be continued throughout the business relationship.

Most financial organizations are apprehensive about being involved in money laundering operations by mistake. The reason for these apprehensive behaviors is the serious consequences of this kind of mistake.  As a result, it is critical to have a solid KYC policy in place to mitigate any risks. A strong KYC and CDD program will not only identify a consumer but will also follow their account activities. The program should provide recommendations for dealing with hazards if they arise.

How do KYC and CDD Differ?

KYC refers to the checks performed at the beginning of a customer relationship to identify and verify that the customers are whom they claim to be. This is especially important for businesses subject to AML (Anti-Money Laundering) legislation.

Know Your Customer processes enable the building of a customer’s risk profile by obtaining their data before establishing a commercial relationship, often through a digital onboarding process that collects their data and identity documents.

Customer Due Diligence, on the other hand, helps you to determine if the information you gave during registration is valid. Furthermore, CDD checks must be done on an ongoing basis throughout the duration of the client relationship, necessitating the keeping and updating of a record of transactions.

KYC checks are thus performed early in the establishment of business relationships, when we screen potential customers, whereas Customer Due Diligence (CDD) is ongoing monitoring of suspicious activities aimed at money laundering, and both are critical components of an anti-money laundering program.

What is the Difference Between KYC and CDD?

There are several similarities between KYC and CDD. The KYC enables the company to develop a risk profile for a customer by retrieving its data before beginning a commercial relationship. The CDD, on the other hand, specifies whether their information is valid or wrong. It also necessitates background and final utility ownership checks. Previous KYC rules for regulated firms have now evolved into CDD programs.

Apart from the emphasis on finance, the key distinction between KYC and CDD is that CDD controls are carried out in a process, and communication with the consumer continues. Furthermore, it provides a framework for ongoing assurance, which is especially useful for firms that deal with numerous day-to-day transactions, such as banks and real estate. They employ sophisticated algorithms designed to track financial transfers and detect questionable circumstances, known as ‘red flags.’ As a result, it preserves the good work done with KYC from the start to the conclusion of the customer relationship and stakeholder activity and has always offered confidence that the organization’s systems are not utilized to launder illegal money.

As a result, the CDD is an essential component of the AML program and is audited regularly, including transaction volume, amount of money, and geographic distribution. However, as a precaution, software systems must be tested and updated regularly to produce results. The ‘regular intervals’ at which monitoring is performed vary depending on the nature and complexity of automated system controls.