Understanding KYC Due Diligence: Basics to Best Practice

In an era of escalating financial crime and intensifying regulatory scrutiny, organisations must treat Know Your Customer (KYC) and Customer Due Diligence (CDD) as strategic imperatives. This is especially true as global bodies like the Financial Action Task Force (FATF) tighten their recommendations, and countries adopt stricter compliance frameworks to counter money laundering and terrorism financing.

Financial institutions, fintechs, and other regulated entities are now required to adopt more granular, real-time approaches to verifying customer identities, assessing risk, and reporting suspicious activity. From the UK and EU to the US and Asia-Pacific, regulatory reform is accelerating and compliance programmes must evolve in tandem.

What is Customer Due Diligence (CDD) in KYC?

Customer Due Diligence is the process of verifying a customer’s identity, understanding their financial dealings, and assessing the risk profile they represent to your business. It's a core component of any AML (Anti-Money Laundering) framework and a legal requirement in most jurisdictions.

Recent regulatory shifts including the EU’s Sixth Anti-Money Laundering Directive (6AMLD) and updates to FATF’s Recommendation 24 on beneficial ownership transparency have raised the bar for what constitutes “sufficient” due diligence. Firms must now capture more detailed customer data (e.g., source of funds, beneficial ownership, date of birth, etc.) and continuously monitor for risk indicators, particularly in high-risk sectors or regions.

Why is Due Diligence So Important in KYC Compliance?

With regulators imposing stricter penalties for non-compliance, effective due diligence has become critical to avoiding legal, financial, and reputational damage. In 2023 alone, global AML fines totalled over $3.2 billion in banking alone, with regulators cracking down not only on misconduct but also on poor due diligence frameworks.

But due diligence isn’t just about box-ticking. It plays a fundamental role in reducing exposure to terrorist financing, fraud, tax evasion, and Politically Exposed Persons (PEPs) attempting to exploit the financial system. By identifying higher-risk customers early, firms can allocate compliance resources more effectively and avoid unnecessary exposure.

Understanding the KYC Due Diligence Process

The due diligence process typically unfolds in three stages, depending on the customer risk:

1. Standard Due Diligence (SDD): Applied to most customers. Involves collecting basic identifying information and verifying it against trusted sources.
2. Simplified Due Diligence (SDD): Applied where risk is demonstrably low (e.g., listed companies or government entities). Less intrusive checks are permitted.
3. Enhanced Due Diligence (EDD): Required for high-risk clients, such as offshore entities or customers from FATF blacklisted jurisdictions. Involves additional scrutiny, document collection, and ongoing monitoring.

A key regulatory update worth noting is the UK’s Economic Crime and Corporate Transparency Act (2023), which expands requirements for beneficial ownership checks, especially in cross-border transactions. Similarly, FinCEN’s Beneficial Ownership Rule, effective from January 2024, mandates all US companies to disclose ownership data for inclusion in a national registry, a game-changer for CDD workflows.

CDD vs EDD: What's the Difference?

While CDD ensures that firms gather the minimum legally required information, EDD is triggered when that’s not enough. For instance, if a client is a PEP or is transacting in a high-risk jurisdiction, firms must dig deeper to understand the source of wealth, assess the legitimacy of business activities, and continue to monitor transactions over time.

The FATF’s updated guidance on EDD for virtual assets and crypto exchanges (2023) specifically targets these sectors, which are increasingly used in financial crime. Regulated firms must now consider transaction volume, anonymity features, and regional risks when applying EDD to crypto-related clients.

How Due Diligence Requirements Vary by Region

United Kingdom

Under the Money Laundering Regulations (MLRs) and the Economic Crime Act, UK firms must maintain a risk-based approach, conduct regular audits, and file Suspicious Activity Reports (SARs) with the National Crime Agency (NCA) when necessary.

European Union

The upcoming EU Anti-Money Laundering Authority (AMLA), expected to launch in 2025, will centralise AML oversight and standardise due diligence requirements across EU member states. This is in addition to the newly adopted AML Regulation, which imposes uniform rules on KYC processes, beneficial ownership, and digital onboarding.

United States

The Corporate Transparency Act (CTA), enforced by FinCEN, will require US businesses to report ownership information. Financial institutions must also adhere to FinCEN’s CDD Rule, which enforces ongoing monitoring and risk reassessment.

Asia-Pacific

Singapore, Hong Kong, and Australia continue to align with FATF guidance but are introducing local enhancements. For example, Australia’s 2024 AML reform bill expands the scope of reporting entities to include legal professionals, accountants, and real estate agents, all of whom must now conduct KYC due diligence.

Overcoming Common KYC Due Diligence Challenges

The volume and complexity of due diligence checks can quickly overwhelm compliance teams, particularly as regulations shift across jurisdictions. Legacy systems, inconsistent data, and manual verification create delays, increase onboarding friction, and heighten the risk of non-compliance.

Regulatory technology (RegTech) is emerging as a key solution to these challenges. Firms are now turning to tools that offer unified risk profiles, document automation, and real-time screening to make their CDD processes more agile, scalable, and auditable.

How Can Automation Improve KYC Due Diligence?

Automation streamlines due diligence by reducing manual errors and enabling real-time decision-making. APIs, AI, and dynamic workflows can automate tasks like:

• Identity verification (including biometric checks)
• Sanctions and PEP screening
• Risk scoring and classification
• Ongoing monitoring and alerting

With increasing global regulatory requirements, automation isn’t just a competitive edge, it’s becoming a compliance necessity. Platforms like FullCircl help businesses implement smart, scalable KYC and Customer Due Diligence processes that can adapt to changing regulations with ease.

What Should You Look For in a KYC Due Diligence Solution?

To stay compliant across jurisdictions and scale operations efficiently, a due diligence solution should offer:

• Global beneficial ownership data and registry access
• Automated PEP/sanctions screening
• Real-time alerts for transaction anomalies
• Country-specific compliance configuration
• Case management and audit trail functionality

Importantly, the solution must also enable enhanced due diligence workflows and integrate with your existing tech stack to drive operational efficiency.

How FullCircl Supports KYC and Real-Time Due Diligence

FullCircl enables regulated businesses to confidently meet both global and national compliance standards. By combining real-time data enrichment, risk scoring, and automated KYC software, AML screening, and document verification, FullCircl helps organisations:

• Rapidly onboard new customers with reduced friction
• Automatically identify politically exposed persons
• Comply with recent laws like the UK Economic Crime Act or FinCEN’s Beneficial Ownership Rule
• Detect and prevent financial crime with live risk signals

Whether you're verifying corporate structures or assessing customer legitimacy across borders, FullCircl provides the tools you need to stay ahead of evolving regulations.

As global regulations grow tighter and enforcement becomes more aggressive, robust KYC due diligence is non-negotiable. Whether you're a traditional bank or an emerging fintech, your ability to identify and manage customer risk determines not only your compliance, but your reputation and resilience.

By embracing automation, adopting real-time data solutions, and staying informed on the latest global regulatory developments, firms can move beyond reactive compliance toward proactive, efficient due diligence.

Want to learn how FullCircl can help you stay compliant, competitive, and confident in an evolving regulatory world? Speak to a compliance expert today.

Frequently Asked Questions (FAQs)

What is customer due diligence (CDD) in KYC?

CDD is the process of verifying a customer’s identity, assessing their financial activities, and determining the level of risk they present. It's a core part of KYC and helps prevent money laundering and financial crime.

Why is due diligence important in KYC compliance?

Due diligence ensures regulatory compliance, helps identify high-risk customers, and protects firms from legal, financial, and reputational risks associated with illicit activity.

How does due diligence reduce financial crime risk?

By validating customer identity and assessing the source of funds, due diligence helps detect suspicious behaviour and prevent fraud, terrorist financing, and money laundering.

What are the types of due diligence in financial services?

There are typically three: simplified due diligence, standard due diligence, and enhanced due diligence (EDD), applied depending on the customer’s risk profile.

What is the KYC due diligence process?

The process includes identity verification, document collection, risk assessment, PEP/sanctions screening, and ongoing monitoring, tailored based on customer risk.

How can companies automate KYC due diligence?

With the use of RegTech platforms, businesses can automate ID verification, screening, document collection, and risk scoring using APIs and machine learning.

What documents are needed for KYC due diligence?

Common documents include government-issued ID, proof of address, company registration data, beneficial ownership records, and information on the source of funds.

What are common challenges in KYC due diligence for regulated firms?

Challenges include fragmented systems, manual processes, poor data quality, high customer onboarding friction, and keeping up with changing regulatory expectations.

What should I look for in a KYC due diligence solution?

Look for automation, global registry access, configurable risk scoring, EDD capabilities, real-time alerts, and seamless integration with your existing workflows.

How does FullCircl support real-time due diligence checks?

FullCircl provides automated data enrichment, live PEP/sanctions screening, beneficial ownership verification, and ongoing risk alerts to power real-time compliance.

What are the benefits of using APIs for KYC due diligence?

APIs enable seamless integration, real-time data updates, reduced manual entry, and faster onboarding, all while improving auditability and compliance accuracy.

Does FullCircl help with enhanced due diligence requirements?

Yes, FullCircl supports EDD through automated risk flagging, deep data analysis, beneficial ownership checks, and configurable workflows for high-risk customers.