Know Your Customer (KYC) and Customer Due Diligence (CDD) are two terms that usually go together.
Some people say that CDD is part of KYC while others say that KYC is part of CDD. Which one is correct though?
According to the Financial Action Task Force (FATF) 40 Recommendations, CDD includes:
Identification and verification of the customer
Identification of the beneficial owner in the case of legal entity or legal arrangement
Understanding the purpose and the intended nature of the business relationship
Conducting ongoing monitoring of the business relationship.
Taking into consideration this definition, CDD covers everything! Then, what is KYC?
ACAMS glossary provides the following definitions:
KYC - Anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is "normal and expected," and to detect activity that is "unusual" for a particular customer.
CDD - A set of internal controls that enable a financial institution to establish a customer's identity, predict with relative certainty the types of transactions in which the customer is likely to engage, and assess the extent to which the customer exposes it to a range of risks (i.e., money laundering and sanctions).
Taking into consideration the above a possible explanation is that:
“KYC” refers to the initial identification and verification measures taken by an entity on onboarding to be able to specify what is the “normal and expected” account movement while “CDD” uses KYC information and applies it taking into consideration the ML/TF/FC (money laundering, terrorist financing and overall financial crime) risk of each and every client.
But that’s only an opinion. There are many other different approaches to KYC/CDD differences. Depending on the jurisdiction you are located, the two terms may be used in different ways! And you know what? That’s fine!
The two terms are interrelated and can both be used to describe your AML measures.
In many cases, I use KYC/CDD together!
Because, in real life, doesn’t make any difference whether I am naming my AML measures as KYC or CDD as long as these measures are in place and in full compliance with AML regulations!
Do you agree?
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