Enhanced due diligence (EDD) is a customer screening process that increases the security of business relationships. EDD is part of the broader practices covered by Know Your Customer (KYC) regulations. KYC requires organizations in specific industries (i.e., the financial sector) to perform customer verification, verify the identity of potential customers, and ensure that they do not pose a high risk.
EDD provides greater insight into potential risks than standard customer due diligence (CDD) processes. Its objective is to provide a higher level of assurance regarding a customer’s identity and risk category. The process involves:
Enhanced due diligence is a special requirement for processing individuals with a high net worth or who represent a high potential risk. It is also required when dealing with large transactions. This is because the risk impact for such individuals and transactions is more significant, requiring tighter regulatory control and monitoring to prevent businesses from supporting illicit activities.
Related content: Read our guide to Customer Due Diligence (CDD)
In this article:
Enhanced due diligence is necessary for high-risk customers or transactions, which carry a high risk of money laundering and terrorist financing and thus represent a more considerable risk to banks. The level of risk associated with customers can relate to their jurisdiction, the financial products sold to them, the characteristics of the individual or company, or the properties of a specific transaction.
Financial institutions must identify high-risk customers and demonstrate they have a close familiarity with those customers.
The following factors can cause a customer to be defined as high risk and thus require enhanced due diligence:
Related content: Read our guide to Customer Due Diligence (CDD) in banking
Enhanced due diligence provides several critical benefits for banks and financial institutions:
{{cta('007d8804-adf3-4d63-890c-9f783f8025e1','justifycenter')}}
The risk-based approach provides an organization with insight into the high-risk customers in their business and other cases that warrant high-risk categorization. This approach demands the accurate judgment of the customer’s risk level. Another essential measure is creating a duration for the due diligence method, and all these items should be apparent in your AML compliance policy.
Distribute a questionnaire in keeping with your risk-based approach to high-risk customers. This questionnaire must offer both essential and detailed information about your customers. Gather additional data from the customers and third parties.
Here are places to obtain additional identifying information from businesses and other legal entities:
Here are places to obtain additional identifying information for politically exposed persons (PEP):
You need to gain information that will show the origination of your customer’s wealth. You must contrast the value of your client’s financial and non-financial assets with their tangible assets to ensure that the sums match. Any irregularities between their wealth source, net worth, or earning are reasons for suspicion, and you should investigate more.
It would be best to determine the beneficial ownership of your client’s organization and double-verify the owner’s identity.
Examine the transaction history of your client, including the processing of the transaction times. This process should also include the nature and purpose of their transactions. Be aware of any inconsistencies between the anticipated value of services and goods and the figure paid or received—any mismatch is a reason to be suspicious.
You should conduct an on-site visit to the physical addresses of all legal entities, including companies and banks. You can physically verify documents that you cannot complete digitally. A risk-based limit is breached if the address provided on the official records does not correspond with the physical address.
After completing all the above steps, you need to determine whether or not the client is too high-risk for you to continue your relationship with them. If you decide that the client is not too high-risk, you must draft a report outlining your EDD plans for overseeing your client in the future.
This report must have a timetable showing when you will conduct monitoring activities. You should then store your information in a secure location, together with the data you have collected so far.
BlueCheck helps financial institutions conduct KYC checks, including identity and age verification, to meet anti-money laundering regulations. Key features include:
Schedule a call today with a BlueCheck specialist to learn more about our Age & ID Verification solutions.
{{cta('007d8804-adf3-4d63-890c-9f783f8025e1','justifycenter')}}