Enhanced Due Diligence
Global regulations require businesses to conduct proper KYC checks to verify the identity and background information of their partner entities. When associating ties with customers and organizations, it is necessary for enterprises to know about their business dealings and past history. Conducting rigorous verification is not always easy and takes technical expertise, time, and effort.
What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence is a set of KYC policies and procedures created to perform in-depth verification of high-risk customers. It helps financial institutions monitor and manage large transactions and assess the potential risk associated with them.
How is CDD Different from EDD?
The primary difference between both is that Enhanced Due Diligence takes place under stringent AML compliance regulations, while Customer Due Diligence is concerned with standard identity verification of the customer using Know Your Customer (KYC) standards. Customers who are recognized as potentially high-risk undergo EDD as per the risk-based approach of the business.
When is EDD Required?
Enhanced Due Diligence becomes necessary when there is a potential risk of money laundering and terror financing associated with an individual or organization. For instance, EDD is necessary when a Politically Exposed Person (PEP) needs to initiate business relations with an enterprise. Since these individuals are at a high-profile public role, they could misuse the authority to launder money.
Apart from this, high-risk countries, complex business structures, and customers which need to make frequent and large transactions are subject to Enhanced Due Diligence. An important part of EDD is verifying the Sources of Funds (SOFs) through an AML compliance program within the organization. Oftentimes, processing the risk-relevant data becomes challenging due to negative news in adverse media.
How to Perform Enhanced Due Diligence?
EDD is the ongoing process of monitoring customer behaviour which takes place under a team of compliance experts. EDD involves a proper set of procedures which are listed below:
The initial step to conduct EDD is to appropriately identify the level of risk associated with the business relation. Once the high-risk customers are recognized through AML screening and background checks, they are classified in a different category for identification.
Creating the EDD Checklist
The EDD process includes creating a well-defined checklist for high-risk customers and transactions. The EDD checklist states all the important details necessary to address customer concerns. It can be created using third-party analytics tools and sources.
Analysing Essential Information
Examining the Ultimate Beneficial Ownership (UBO) and the Source of Funds (SOF) is a significant part of the EDD process. This guarantees that the customer’s sources of income are financially legal. Any inconsistency in sources of wealth and earnings are handled and resolved at this stage of the process.
Continuous Transaction Monitoring
This step involves verifying the customer’s transaction history through ongoing KYC verification. Details like transaction durations, the type and amount of current and past associated parties are also put through comprehensive inspection.
Adverse Media Screening
Looking for negative news and adverse media about the customer from public and third-party data sources, and checking for possible association is a part of the EDD process as well. The customer is too risky to conduct a business with if the results are negative.
Enhanced Due Diligence Checklist
Enhanced Due Diligence is a requirement for financial businesses under certain circumstances which pose a high level of risk to the organizations. Some of them are listed below:
- Politically Exposed Person (PEP): An executive or official appointed by the state, a political party or an international organization.
- High-risk Country: The customer lives in a country which has inadequate AML/CFT regulations identified by the FATF. Countries not members of the FATF or under sanctions are also high-risk.
- Foreign Customer base: The business entity has most of its clients from other countries or states.
- Terrorist Activities: Countries which have designated terrorist organizations and their funding is common.
- The customer lives in a country having widespread corruption.
- The business involves frequent large transactions.
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