Definition:
Customer Due Diligence (CDD) refers to the process of verifying a customer’s identity, assessing risk levels, and ensuring compliance with anti-money laundering (AML) regulations before engaging in financial transactions.

Contextual Explanation:
Financial institutions, Payment Service Providers (PSPs), and Virtual Asset Service Providers (VASPs) must perform CDD to detect suspicious activities and prevent financial crimes. CDD includes identity verification, transaction monitoring, and ongoing customer risk assessment.

Why It Matters:
Effective CDD helps mitigate risks associated with money laundering, fraud, and terrorist financing. Failure to conduct proper CDD can result in regulatory fines and reputational damage.

Example:
A PSP onboarding a new merchant must verify business registration details, conduct identity checks on the owners, and assess transaction behaviors to comply with FINTRAC regulations.