Detailed Guide on Customer Due Diligence – Best Practices for Small Businesses

Detailed Guide on Customer Due Diligence - Best Practices for Small Businesses
Detailed Guide on Customer Due Diligence - Best Practices for Small Businesses
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Customer Due Diligence (CDD) is the process of gathering customer information and performing background checks on potential and existing customers. It is a major requirement for KYC & AML compliance and helps businesses accurately assess the level of risk customers pose.

But how to perform customer due diligence? Well, read along to find out. This blog discusses the top 8 CDD best practices that small businesses must follow to stay compliant and prevent online financial frauds such as money laundering.

Top 8 Customer Due Diligence Best Practices

1.   Have Clear Procedures and Policies in Place

Small businesses must have all the policies/guidelines in place that outline the steps they need to take for certifying customer identities and to assess & mitigate the risks the customers pose. The policies should sync with the latest government regulations to help businesses stay compliant.

2.   Implement an Effective Customer ID Verification System

The primary motive of CDD is helping businesses verify customer identities effectively. So, having a robust customer ID verification system is essential. An ideal customer ID verification should be able to verify government-issued IDs such as passports, PAN, and Aadhaar against all types of sanction lists. This will help ensure only genuine customers are onboarded.

3.   Monitor All Transactions

Customer due diligence doesn’t end once a customer is onboarded. It’s a continuous process, meaning businesses must monitor all customer transactions (unusual source or destination of funds, unusual transaction volume) once they’ve been onboarded for suspicious activities. Criminals have become smart and usually sneak through the initial checks.

In addition, if businesses find anything inappropriate/suspicious, they must inform the appropriate authorities ASAP.

4.   Keep and Update the Record of the Necessary Customer Data

Businesses must record important customer information and transaction data to comply with judicial guidelines. This data usually includes the customer’s date of birth, name, address, and transaction data such as transaction type, amount, date, etc. Also, this information should be updated as and when required.

5.   Give Necessary Training to Employees

How would employees know what to look for when monitoring transactions, customer activity, or onboarding new customers? Via training. Therefore, businesses must ensure that all their employees are trained well and know the importance of customer due diligence.

6.   Conduct Periodic Reviews of Customer Profiles

When onboarding, businesses usually create a risk profile that tells the level of risk a customer poses. And these risk profiles must be reviewed after regular intervals. This helps identify the customers who’ve moved up the risk ladder and need more vigilant monitoring.

7.   Have a Plan for Producing the Stored Information

Businesses usually store customer data to improve customer experience and comply with regulatory guidelines. However, government or investigation authorities might need access to this data for audits from time to time. And to ensure a seamless experience, businesses should have a well-crafted plan to share all the information as and when required.

Pro Tip: Businesses mustn’t store any customer information on paper. It should be in a digital format to be easily accessible when required.

8.   Notify customers of the CDD process

Businesses must ensure that customers are notified about the entire CDD process. Also, they should know what information is being collected from them and for what purposes.

 Wrapping up

Customer due diligence is perhaps the best way businesses can stay compliant and save their business & customers from financial fraud. And now that you have the CDD best practices at your disposal, it’s time to implement them and give your business a competitive edge.


Is Customer Due Diligence mandatory?

Mostly, CDD is not mandatory; however, in some countries, businesses operating in the financial industry need to mandatorily perform customer due diligence as a part of AML regulations.

What is the difference between KYC & CDD?

KYC, or know your customer is a method of verifying a customer’s identity and risk level. And CDD, or customer due diligence, is how you can achieve that.

What happens if a business fails to conduct CDD?

Failing to conduct or perform CDD can make your business and customers more vulnerable to cyber attacks or financial fraud. In addition, it can lead to financial penalties and legal repercussions as it’s mandatory for several businesses in several countries.

Moreover, without CDD, you may face reputational damage. And this can lead to customer churn, further impacting your business’s bottom line.

How does Customer Due Diligence Help Business Prevent Fraud?

Customer due diligence majorly involves verifying customers’ identities and monitoring their activities continuously. This way, businesses onboard only the individuals who they think are safe. And all the onboarded customers are monitored closely. So, even if a customer poses a security risk, businesses can deal with them easily, ensuring security.