Customer Due Diligence ("CDD") is a process required by law in the UK and is an Anti Money Laundering measure designed to help stop Money Laundering.
Why does it matter? Ultimately, Customer Due Diligence is designed to make society safer but in more immediate circumstances, failure to undertake Customer Due Diligence can result in a potential customer not being accepted as a customer and could result in severe penalties if Money Laundering is proved.
All accountancy firms have to undertake Customer Due Diligence on all prospective customers to ensure that they know where the customer's Start-Up money came from, that allowed the customer set up in business. This is to make sure that none of this money resulted from crime, terrorist activities or from Politically Exposed Persons (PEPs).
As a result of Customer Due Diligence, customers are risk-assessed to determine if their business is High Risk where a business has a complex structure and there is difficulty in establishing the Beneficial Owners - the "real" owners - or where is a lot of cash or high value cash transactions; Medium Risk, which is also called the Standard Risk as it is the most common risk level where vigilance is needed and Best Practice standards need to be set and maintained to help reduce the risk of criminal activity; or Low Risk which can include public companies with stringent disclosure requirements to the Government or other authority bodies.
Once an accountancy business has taken on a new customer and established the risk level, Customer Due Diligence must be reviewed at regular intervals to ensure that the risk level remains appropriate to a customer and that the customer is taking appropriate measures to minimise the risk.