The implementation of EDD serves as an active defence system to combat financial crimes across the industry. But how much does enhanced due diligence influence your company’s capacity to handle regulatory expectations and ensure financial crime prevention? In this guide, we’ll discuss what is enhanced due diligence, how it works, its implementation strategies, and the necessary steps to achieve success. So, let’s get started:
What is Anti Money Laundering Enhanced Due Diligence (EDD)?
Enhanced Due Diligence (EDD) is an intricate risk assessment mechanism that collects and evaluates information on elevated-risk clients and business partnerships to detect and lower the possibility of money laundering and terrorist financing crimes.
Companies performing EDD must add multiple procedures to verify and track the activities of their high-risk and high-net-worth clients who execute substantial transactions. Moreover, the financial industry monitors high-risk customers and transactions because of elevated dangers through strict regulatory procedures.
Why Should Businesses Prioritize Enhanced Due Diligence?
Businesses that wish to establish robust AML requirements need enhanced due diligence measures as their main foundation. Companies should implement enhanced due diligence and acquire extra details to evaluate the risk of money laundering activity and its associated high-risk individuals.
The following points demonstrate why an enhanced customer due diligence process remains essential:
- Efficient Compliance Workflows
EDD involves more insights which help improve entire AML compliance operations by disclosing key information about customer-held assets and their financial activities. Organisations must use effective EDD techniques because they can conform to their legal responsibilities to avoid money laundering activities and prevent terrorist funding efforts.
Moreover, EDD helps in run-time detection by optimising boarding procedures and continuing oversight to handle emerging concerns immediately.
- Accurate Risk Management.
Organisations gain improved risk understanding by collecting extra information regarding their customers information and transactions. Extended awareness about risks enables financial controllers to find suspicious behaviours while decreasing the probability of money-related offences.
Also, the implementation of EDD protects organisations from financial losses and maintains a good reputation by complying with regulatory standards.
- Improved Internal AML System
By implementing EDD procedures, organisations can improve all internal processes supporting their essential AML program. Existing EDD in banking augment PEPs and sanction screening activities. Further, organisations need to obtain more client information and run that data against sanction list databases to determine their standing regarding high-risk countries with which they maintain business ties.
Red Flags to Implement Enhanced Due Diligence Measures
Warning signs known as red flags provide evidence of criminal conduct, including ML/FT and PF. DNFBPs can use red flag indicators to determine when EDD is necessary. The red flags function differently depending on customer identification, the nature of the business, and the types of transactions.
The following signs serve as indications for DNFBPs to require EDD measures:
- Commercial customers from FATF grey list countries are considered high-risk entities in these jurisdictions and other subjects under increased monitoring.
- Politically exposed persons or their associates fall within the customer profile.
- If a customer has previously faced any criminal charges, including financial offences, the law is currently processing their case.
- A customer demands payment for their transaction through virtual assets.
- There exist doubts about whether the customer’s assigned risk level is appropriate.
- The customer falls under the non-profit organisation classification (NPO).
- The company authorises a specific person to act on their behalf through their mandate.
- Media reports indicate that customers were involved with monetary fraud involving ML/FT and PF during their past association.
- The transaction requires intermediaries who lack logical explanations for their involvement in the process.
- Customers who have an unusually complicated legal business structure.
- Potential customers avoid revealing their final beneficial ownership to the financial institution.
Who are High-Risk Customers?
Any customer who can endanger a company through operational or security threats falls under high-risk third countries clients. The risk profile of these people involves the ability to escalate compliance issues while practising fraud and initiating security-related breaches.
Identifying high-risk customers (PEPs) in the EDD process must require companies to establish their political position type, influence duration, and complete analysis of their funding methods.
EDD Requirements for High-Risk Customers
All organisations must gather extra information about high-risk customers through the EDD process and additional measures. This data includes:
- Business information: Acquiring complete details about corporate clients requires owners’ structures, important stakeholders and business operations data under an enhanced due diligence checklist.
- Beneficial ownership: To prevent hidden ownership risks, the organisation must identify all persons who finally exercise authority over the customer entity.
- Source of funds: Legitimation aims to uncover the proper sources through which customers obtain their funds and wealth before determining their worthiness.
- Enhanced identity verification: Businesses should enhance identity verification protocols through additional checking methods, including selfie authentications, address confirmation, and strong customer identity confirmation.
- Risk indicators: The risk assessment process requires assessing multiple factors affecting individual customers, such as their geographic position, industrial segment, transaction patterns, and legal history.
How to Execute Enhanced Due Diligence Measures?
The process of conducting EDD includes multiple complex stages that professionals can accomplish by performing simpler tasks. The following list shows a few examples of procedures that enhanced due diligence required:
- Using A Risk-Based Approach
This procedure helps you find high-risk clients for a comprehensive investigation. Your AML regulatory compliance requires an exact risk assessment of customers since their money laundering or terrorism financing crimes might occur through your business operations. Organisations running without fundamental anti-money laundering compliance programs will likely receive official penalties.
- Finding Additional Credentials
A checklist must exist to direct AML BSL policy creation for high-risk customer evaluation. Advanced due diligence procedures contain every essential fact about your business’s customers.
- Investigation of Funds’ Origin and Their Ultimate Useful Ownership (UBO)
Businesses must determine the source of existing customer funding and its authentic nature. Corporate entities must confirm that all customer assets, including financial elements, align with genuine assets.
Detection and thorough inquiry into discrepancies between the customer’s earnings and their wealth source along with net worth must occur. Moreover, determining Ultimate Useful Ownership for businesses requires examining all business subsidiaries and their shareholders.
- Tracking Ongoing Transactions
A check should always be made for customers who have existing transaction records. Companies should research transaction information by reviewing the purposes and natures of transactions and examining processing timelines and stakeholder involvement. Also, companies must verify that their process accuracy measure meets the set performance standards.
- Adverse Media and Negative Control
Companies should review articles from media sources to understand their customers’ public reputations comprehensively. People or businesses considered unsafe to work with will generate negative business results from the evaluation process.
- On-Site Visits
Properly reviewing legitimate business organisations requires staff members to visit their physical locations. Moreover, businesses should pay attention to the physical validation of selected documents because differences between what entities register in official records and where they operate could signify substantial risk factors when pursuing business transactions.
- Investigative Reporting for Risk Assessment
Businesses should establish industry-dependent risk criteria to build their compliance system. AML compliance software produces regularly generated investigative reports and customer screenings, which help companies detect suspicious activities while meeting regulatory requirements.
- Implementing Continuous Risk-Based Monitoring
High-risk customer monitoring needs to be approached through a systemised continuous process. Business operations benefit from automated software alerts identifying abnormal customer activities before potential threats escalate.
Enhanced Due Diligence Vs Customer Due Diligence
As you know, what is enhanced due diligence in AML; it mustn’t be confused with the standard Customer Due Diligence (CDD) process. AML compliance requires both processes to operate before customer additions or transaction procedures start. The following table shows the differences between CDD and EDD:
| Feature | Customer Due Diligence (CDD) | Enhanced Due Diligence (EDD) |
| Definition | Basic identity verification for low-risk customers. | In-depth investigation of high-risk customers. |
| Risk Level | Applied to standard or low-risk customers. | Applied to high-risk or suspicious customers. |
| Verification Process | Basic KYC (Know Your Customer) checks include ID verification and proof of address. | Additional checks include source of funds, background screening, and continuous monitoring. |
| Monitoring | Periodic review based on standard policies. | Ongoing and more frequent monitoring of transactions. |
| Regulatory Requirement | Required for all customers under AML laws. | Required for customers flagged as high-risk (e.g., PEPs, large transactions, offshore accounts). |
| Documentation Needed | Basic identity documents like passport, driver’s license, and utility bills. | Additional documents include bank statements, financial records, and business details. |
Enhanced Due Diligence Checklist as Recommended by FATF
Effective EDD measures in KYC and AML processes require the five steps defined by the Financial Action Task Force (FATF):
- Additional credible identifying details should be gathered from multiple authoritative sources to reinforce verification.
- Organisations must conduct comprehensive background checks beyond basic searches to improve risk evaluation.
- A thorough verification of financial fund origins must establish that the money comes from a legitimate source, which avoids any connection to criminal activity.
- Collect information regarding the reasons behind business relationships and transactions.
- The organisation should create an intelligence report, which documents essential information about customers and beneficial owners to enable continuous tracking.
Final Words
Understanding what is enhanced due diligence in AML is essential for businesses dealing with high-risk clients. Through enhanced due diligence procedures, businesses achieve better anti-money laundering compliance through complete risk assessment and ongoing monitoring methods verifying financial activities to stop potential money laundering crimes. On the other hand, business organisations without a strong approach to EDD may encounter regulatory sanctions and financial loss.
Does your organisation have a robust AML strategy to address high-risk financial threats? If not, our Xpert Advisory team focuses on AML consultancy services with specialised EDD solutions to keep your businesses secure while meeting regulatory standards. So, contact us now to establish your AML framework with complete confidence.
FAQs
What are the Types of Due Diligence Procedures?
The due diligence checks operate at three levels: simplified, standard and enhanced. The security level depends on the customer’s transaction risks and the risks associated with their business operations.
What Factors Determine EDD Measures?
Anti-money laundering due diligence entails basic information verification of customers, funds source verification, beneficial owner assessment, transaction monitoring, and PEP screening activities while performing tests for overall exposure risk and recording all findings.
Why Does the EDD Procedure Differ from the KYC Process?
Under knowing your customer (KYC) processes, an enhanced due diligence process enables businesses to collect data to authenticate clients’ and customers’ identities.
