According to the Financial Crime News, compliance regulators all across the globe have imposed fines against financial organisations of approximately $38.47 Billion. However, the reasons behind these penalties were sanction-relation violations and AML offences Billions of fines since 2000.
Well, for many financial organisations, customer due diligence is one of the most important elements of Know Your Customer compliance regulation. However, this procedure is crucial to remain compliant with Anti-Money Laundering laws and principles to protect businesses from any kind of financial crimes.
Anyhow, if these financial companies do not get satisfied with the CDD process and decide to conduct further processes to assess customer compliance. This process is called Enhanced Due Diligence. In this blog, you will learn everything about the enhanced due diligence process, how it is conducted in KYC, and the requirements to help companies prevent any kind of financial loss.
What is Enhanced Due Diligence?
Enhanced Due Diligence or EDD is a comprehensive form of the Customer Due Diligence process, which is conducted by businesses to collect further information about the client. It is used to execute a more powerful evaluation of high-risk users such as politically exposed persons or those with unusual transactions.
The EDD process involves the collection of information about the customer from a number of sources such as government databases, public records, and human intelligence sources. Not only this but the information is also gathered by conducting extensive interviews and investigations with clients and other parties involved.
The purpose of Enhanced Due Diligence is to obtain an in-depth understanding of the risks related to the user with transactions. Another goal is to identify the signs and red flags of money laundering and other financial crimes.
Well, EDD in money laundering is a vital process for companies who are obliged to comply with KYC and AML regulations. It is generally required by regulatory entities to detect and reduce risks and fraudulent activities within their businesses.
Customer Due Diligence vs Enhanced Due Diligence
When it comes to CDD vs EDD, bear in mind that customer due diligence is the basic level of the due diligence process which is implemented on all customers during the onboarding journey. On the other hand, enhanced due diligence is an advanced level of due diligence procedure which is only performed on high-risk customers. Not only this, EDD KYC needs more comprehensive information and documentation for detailed customer assessment.
However, some key differences between CDD vs EDD are:
|Aspects||Customer Due Diligence||Enhanced Due Diligence|
Performed during the onboarding process and periodically updated based on risk assessment
Conducted in case of a significant change in the customer's risk profile or when the customer is deemed high-risk
Performed on all customers
Triggered when a higher level of risk is identified
Basic customer identification and verification documents, such as:
Additional documentation, such as:
Lower level of scrutiny and investigation
Higher level of scrutiny and investigation
What is Enhanced Due Diligence Needed for?
Usually, financial firms need to conduct enhanced due diligence processes on clients and businesses they are going to build new relationships. However, this process is required for the following entities:
- Politically exposed persons and people associated with them
- Businesses operated in high-risk countries
- Companies that are potent to be involved in high-risk activities such as gambling
- Ultimate beneficial owners
- Private and corresponding banking firms
- Shell corporations
- Blacklisted companies
- Terrorist funding organisations
How is Enhanced Due Diligence Conducted?
Enhanced due diligence checks are conducted in several steps. However, as compared to the customer due diligence, the EDD process is more challenging and complicated that needs time and patience. Enhanced due diligence requirements are mentioned below:
i. Implementing a Risk-Based Approach
Integrating a risk-based approach is essential in both CDD and EDD processes within a financial industry. Yet, you need further information for high-risk users. Keep in mind that implementing this approach varies from person to person. Companies should mend this strategy as per the case and risk level of the client. To do this successfully, the client is gone through a risk score analysis to carry out the level of risks.
ii. Acquiring Further Information
After integrating a risk-based approach with the customer, companies obtain further information from the client. This information is not only collected directly from the customer but from multiple sources such as third parties, government agencies, or some companies’ databases.
In the case of a politically exposed person, the data is collected about their title, designation, businesses they possess, and the influence they have. On the other hand, if the EDD process is conducted on a business, companies may request information about the board members, investors, partners, and associated people.
iii. Analysing Ultimate Beneficial Ownership
Moreover, companies need to determine the source of funds and source of wealth of the customer to ensure the legitimacy of their money. Besides, the value of customers’ financial and non-financial assets are also verified during the enhanced due diligence checklist procedure. In case financial organisations find any suspicions in the origins of a customer's wealth or net worth, these businesses are further verified under the UBO of the company.
iv. Monitoring Customer Transactions
Another step is checking and keeping track of customer transaction history. It includes the details of the transactions such as the purpose and the type of transactions. Nonetheless, it is investigated on the basis of the processing times and interested parties. In addition, firms should also make sure that the accuracy of the translation meets the EDD standards.
v. Adverse Media Screening
Financial firms such as banks should analyse the relevant media sources and journals about the customer to get complete insights about user profile and their reputation in the market. However, if they find negative remarks about the client, it means the customer’s risk level is high.
vi. Conducting Onsite Visit
Still, if the company is not sure about the risk level associated with the individual, they can conduct an onsite visit to meet the customer in person. Through this, they can verify whether or not their documents match their identity and physical business matches the mentioned address. With an onsite visit, companies usually request clients' physical documents instead of sending them digitally.
vii. Developing a Strategy Report
Once the EDD process is complete, the financial firm creates an enhanced due diligence report. This report includes a schedule that shows when to carry out particular monitoring activities and a summary of the decisions made by the company. It also includes copies of documents and information acquired by the client. When the report is ready, it is stored in the company’s database and is used in case of further regulatory checks in the future.
So, if you often employ new customers or decide to build relationships with new businesses, conducting due diligence is very important. However, in the case of high-risk customers, enhanced due diligence should be implemented to prevent your businesses from getting associated with any potential risks.
If you want to learn more, get in touch with KYC AML Guide experts and make the right decisions for your business.