Legal Requirements for Customer Due Diligence in Different Jurisdictions

Customer Due Diligence (CDD) is a critical aspect of the global fight against fraud, money laundering, and terrorist financing. Financial institutions and other regulated entities must perform CDD to identify and verify the identities of customers, assess risks, and comply with global and local regulations.

As businesses expand across borders, understanding how CDD requirements differ between jurisdictions is vital. By adhering to these varying laws, companies can ensure they remain compliant with both domestic and international standards.

Why Legal Compliance Matters in CDD?

Strict legal compliance is essential for financial institutions as non-compliance may result in severe penalties, including regulatory fines and reputational damage. According to the Financial Action Task Force (FATF), non-compliant businesses face sanctions that can severely impact their operations.

Beyond penalties, adhering to CDD regulations helps maintain the integrity of the financial system. Financial institutions that enforce strong CDD practices reduce the likelihood of their services being used for illegal activities.

How Do International Standards Influence CDD?

The FATF sets global standards for anti-money laundering (AML) and countering the financing of terrorism (CFT). Its recommendations provide guidelines for countries to develop their CDD regulations, though each country implements these recommendations differently.

For example, FATF requires Enhanced Due Diligence (EDD) for high-risk customers such as Politically Exposed Persons (PEPs). These higher-risk clients are to be put under the spotlight to minimize the risks of illicit activities. Despite FATF’s global influence, different ways of implementation create differences in CDD requirements from one country to another.

CDD Requirements in Major Jurisdictions

The following sections outline the key CDD requirements in some of the world’s major jurisdictions, highlighting the differences in how CDD is regulated and enforced.

What Are the CDD Requirements in the United States?

In the United States, CDD requirements are primarily governed by the Bank Secrecy Act (BSA) and the USA PATRIOT Act.

• Financial institutions are required to establish and maintain a written AML program that includes CDD procedures.
• CDD requirements in the U.S. involve identifying and verifying the identity of customers, understanding the nature and purpose of customer relationships, and conducting ongoing monitoring to identify and report suspicious activities.
• Enhanced Due Diligence (EDD) is required for high-risk customers, such as PEPs and those from high-risk jurisdictions.
• The Financial Crimes Enforcement Network (FinCEN) plays a key role in enforcing CDD requirements and issuing guidance on compliance.

How Does the European Union Regulate CDD?

The European Union’s approach to Customer Due Diligence is governed by the Anti-Money Laundering Directives (AMLD), with 6AMLD being the most recent iteration.

• Under EU law, financial institutions and other obligated entities must apply CDD measures when establishing a business relationship, carrying out occasional transactions above a certain threshold, and in cases of suspicious activity.
• The EU requires a risk-based approach to CDD, where the level of due diligence is adjusted based on the risk posed by the customer or transaction.
• EDD is mandatory for high-risk situations, including dealings with PEPs, customers from high-risk third countries, and complex transactions.
• The EU has also introduced centralized registers of beneficial ownership information, which financial institutions can access as part of their CDD procedures.

What Are the CDD Regulations in the Asia-Pacific Region?

The Asia-Pacific region presents a diverse regulatory landscape, with CDD requirements varying significantly from one country to another.

• In developed markets like Australia and Singapore, CDD requirements are stringent, with solid frameworks in place for identifying and verifying customers, monitoring transactions, and reporting suspicious activities.
• Countries like China and India have also strengthened their CDD regulations in recent years, aligning more closely with international standards.
• In some emerging markets, however, CDD requirements may be less developed or inconsistently enforced, reflecting challenges related to regulatory capacity and the informal nature of the financial system.
• The Asia-Pacific Group on Money Laundering (APG), a regional FATF-style body, plays a key role in promoting and supporting the implementation of effective CDD measures across the region.

Key Differences in CDD Across Jurisdictions

CDD regulations are far from being unified. Understanding the key differences across jurisdictions can help businesses adapt their compliance strategies:

1. Risk-Based Approaches: While FATF encourages a risk-based approach, the level of enforcement varies. In some countries, financial institutions must assess the level of risk posed by customers and apply appropriate CDD measures. High-risk clients may require EDD, while low-risk clients can go through simplified CDD.
2. Thresholds for CDD: Some jurisdictions require CDD for all transactions, while others set thresholds based on the value of the transaction. For example, the EU mandates CDD for transactions over €10,000, while in the U.S., the threshold is $3,000 for wire transfers.
3. Access to Beneficial Ownership Information: The EU has created centralized registers for beneficial ownership, accessible by financial institutions for CDD purposes. In contrast, countries like the U.S. are only beginning to implement beneficial ownership databases after passing the Corporate Transparency Act in 2021.

What Are the Challenges in CDD for Emerging Markets?

Implementing CDD in emerging markets presents unique challenges. One of the primary challenges is the lack of regulatory capacity and resources. Many emerging economies face constraints in terms of the financial and human resources needed to enforce CDD requirements effectively. This can lead to inconsistencies in CDD measures and a higher risk of financial crimes going undetected.

Another challenge is the usage of informal financial systems in many emerging markets. In these environments, large segments of the population may not have access to formal banking services, making it difficult to implement traditional CDD measures. This can create opportunities for money laundering and terrorist financing, as transactions conducted outside the formal financial system are harder to monitor and regulate.

CDD Solutions by Sanction Scanner

To ensure effective compliance, businesses operating in multiple jurisdictions must set their CDD procedures. Using automated solutions, like those provided by Sanction Scanner, businesses can stay compliant with varying local regulations while maintaining a global approach. 

Sanction Scanner’s tools provide real-time access to global sanctions lists, politically exposed persons (PEP) databases, and adverse media coverage, enabling businesses to conduct thorough CDD checks quickly. The platform also supports ongoing monitoring, allowing businesses to stay updated on changes in customer risk profiles and respond proactively to potential threats. 

To make sure your CDD measures are flawless, contact us or request a demo today.