What is Enhanced Due Diligence (EDD)?

What is Enhanced Due Diligence?

Enhanced Due Diligence (EDD) refers to a higher level of scrutiny and investigation conducted by businesses and financial institutions when dealing with customers or clients who pose a higher risk of involvement in illicit activities. EDD goes beyond standard due diligence procedures and involves gathering additional information, conducting more thorough assessments, and implementing enhanced monitoring measures.

The purpose of EDD is to gain a deeper understanding of the customer's background, business activities, sources of funds, and potential risks associated with the relationship. By conducting EDD, organisations can mitigate risks, comply with regulatory requirements, and prevent involvement in illicit activities such as money laundering, terrorist financing, fraud, corruption, or other financial crimes.

EDD procedures may vary depending on the nature of the business, industry, and jurisdiction, but they often involve the following elements:

1. Customer Identification and Verification: EDD includes comprehensive customer identification and identity verification This may involve gathering additional identification documents, verifying the authenticity of documents provided, and conducting more rigorous checks to establish the customer's identity.
   
   
2. Enhanced Risk Assessment: EDD requires a more detailed risk assessment of the customer or client. This assessment takes into account factors such as the customer's country of residence, business activities, industry sector, volume and frequency of transactions, sources of funds, and any known association with high-risk jurisdictions, politically exposed persons (PEPs), or sanctioned individuals/entities.
   
   
3. Source of Funds and Wealth Assessment: EDD involves a thorough examination of the customer's sources of funds and wealth. This includes identifying the origin of funds, assessing the legitimacy of income and assets, understanding the customer's business operations, and evaluating the overall financial profile to identify any inconsistencies or suspicious activities.
   
   
4. Ongoing Monitoring and Review: EDD requires enhanced monitoring and ongoing review of the customer relationship. This may involve increased transaction monitoring, more frequent reviews of account activity, and regular updates of customer information. Any suspicious or unusual transactions or behaviour identified during the monitoring process are reported to the appropriate authorities.
   
   
5. Enhanced Internal Controls: Organisations conducting EDD may need to implement additional internal controls and procedures to manage the higher risks associated with the customer or client. This may include increased senior management oversight, more robust record-keeping, and specific protocols for handling high-risk relationships.
   
   
6. Compliance with Regulatory Requirements: EDD is often a regulatory requirement in certain jurisdictions and industries. Financial institutions, money service businesses, and other regulated entities are obligated to conduct EDD as part of their anti-money laundering (AML) and counter-terrorist financing (CTF) measures to comply with legal and regulatory obligations.

By implementing enhanced due diligence procedures, organisations can better assess and manage the risks associated with high-risk customers or clients, comply with regulatory requirements, and prevent their involvement in illicit activities. EDD helps organisations make informed decisions about engaging in business relationships, mitigates risks, and contributes to maintaining the integrity of the financial system.

What is the difference between Enhanced Due Diligence (EDD) and Customer Due Diligence (CDD)

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are two distinct stages of the due diligence process conducted by businesses and financial institutions. While they share the common goal of assessing the risk associated with a customer or client, there are key differences between the two:

Customer Due Diligence (CDD): CDD is the initial stage of due diligence performed for all customers or clients. Its primary objective is to verify the identity of the customer, understand the nature of their business or activities, and assess the risk level they pose. CDD typically involves the following steps:

1. Customer Identification: Collecting and verifying the customer's identification documents, such as passports, IDs, or business registration certificates, to establish their identity.
   
   
2. Customer Verification: Confirm the accuracy of the information provided by the customer through reliable and independent sources, such as government databases or credit bureaus.
   
   
3. Understanding the Nature of the Business Relationship: Obtaining information about the customer's business activities, ownership structure, and purpose of the relationship to determine the level of risk associated with the customer.
   
   
4. Assessing the Risk: Conducting a risk assessment based on factors such as the customer's country of residence, industry sector, transaction patterns, and any known association with high-risk entities or jurisdictions.

Enhanced Due Diligence (EDD): EDD is a more comprehensive and in-depth level of due diligence conducted for customers or clients who pose a higher risk based on the initial CDD assessment. EDD involves gathering additional information, conducting more thorough investigations, and implementing enhanced monitoring measures. The purpose of EDD is to gain a deeper understanding of the customer's background, sources of funds, and potential risks associated with the relationship. Key elements of EDD include:

1. Enhanced Risk Assessment: Conduct a more detailed risk assessment of the customer based on factors such as the complexity of their business activities, geographic location, involvement in high-risk industries, and any red flags identified during the CDD stage.
   
   
2. Source of Funds and Wealth Assessment: Conduct a detailed analysis of the customer's sources of funds, origin of wealth, and legitimacy of income or assets to identify any potential money laundering or illicit activities.
   
   
3. Enhanced Monitoring: Implementing enhanced monitoring measures to closely track the customer's transactions, behaviour, and account activity. This may include real-time transaction monitoring, periodic reviews, and ongoing scrutiny of the customer's activities.
   
   
4. Ongoing Review: Conduct regular and frequent reviews of the customer relationship to ensure the continued appropriateness of the risk classification and the adequacy of the implemented controls.

The main difference between CDD and EDD lies in the level of scrutiny and depth of investigation conducted. CDD is a standard process conducted for all customers, while EDD is applied to higher-risk customers identified during the CDD stage. EDD involves more extensive information gathering, analysis, and monitoring to mitigate the increased risk associated with these customers. Both CDD and EDD are essential components of an effective anti-money laundering (AML) and know-your-customer (KYC) framework, helping businesses and financial institutions assess and manage risks related to their customer relationships.

If you can find out more about Know Your Customer (KYC) in our article Why is KYC Important?

What is Enhanced Due Diligence Required For?

Enhanced Due Diligence (EDD) is typically required for customers or clients who pose a higher risk based on the initial Customer Due Diligence (CDD) assessment. The purpose of EDD is to gather additional information, conduct more thorough investigations, and implement enhanced monitoring measures to mitigate the risks associated with these high-risk individuals or entities. Here are some situations or factors that may trigger the need for EDD:

1. High-Risk Jurisdictions: If the customer or client is from or has connections to countries or regions known for a high risk of money laundering, terrorist financing, or other illicit activities, EDD may be required.
   
   
2. Politically Exposed Persons (PEPs): PEPs are individuals who hold prominent public positions or have close associations with public officials. Engaging with PEPs often presents a higher risk of corruption, bribery, or abuse of power, requiring EDD to ensure appropriate risk mitigation measures are in place.
   
   
3. High-Risk Industries: Certain industries, such as casinos, money service businesses, non-profit organisations, and virtual currency providers, are considered higher risk due to their susceptibility to money laundering or terrorist financing. Conducting EDD on customers operating in these industries helps to identify and manage the associated risks.
   
   
4. Unusual Transaction Patterns: Transactions or account activities that are unusual, complex, or inconsistent with the customer's profile or expected behaviour may trigger the need for EDD. This could include large cash transactions, frequent and high-value international transfers, or transactions involving sanctioned countries or entities.
   
   
5. Complex Ownership Structures: If the customer or client has complex ownership structures, offshore entities, or trusts, it can increase the risk of hidden beneficial ownership, layering, or other illicit activities. EDD helps to unravel these structures and understand the true ownership and control of the customer.
   
   
6. Negative Media or Adverse Reputation: Customers or clients with negative media coverage, involvement in legal disputes, or a history of regulatory violations may require EDD to assess the potential risks and reputational impact associated with the business relationship.
   
   
7. Higher-Risk Products or Services: Offering certain financial products or services, such as correspondent banking relationships, private banking, or trade finance, may warrant EDD due to the inherent risks associated with these activities.
   
   
8. Regulatory Requirements: Regulatory authorities may mandate EDD for specific customer segments or transactions based on local laws and regulations. Compliance with these requirements is crucial to avoid penalties or legal repercussions.

By conducting EDD, organisations can gather additional information, assess the risks associated with high-risk customers or clients, implement enhanced monitoring measures, and ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations. EDD is a crucial component of risk-based approaches to prevent financial crimes and maintain the integrity of the business and financial sectors.

How does Enhanced Due Diligence Work in Know Your Customer (KYC) & Anti Money Laundering (AML) Practices?

Enhanced Due Diligence (EDD) plays a crucial role in Know Your Customer (KYC) and Anti-Money Laundering (AML) practices by providing an additional layer of scrutiny and risk assessment for higher-risk customers or clients. Here's how EDD works within the context of KYC and AML:

1. Risk Assessment: EDD is triggered by the identification of higher-risk customers during the initial Customer Due Diligence (CDD) process. A risk-based approach is followed to determine which customers require EDD based on factors such as their country of residence, industry sector, transaction patterns, associations with high-risk jurisdictions or individuals, and other risk indicators.
   
   
2. Additional Information Gathering: EDD involves gathering additional information beyond the standard KYC requirements. This can include detailed information about the customer's business activities, ownership structure, financial statements, sources of funds, and other relevant documentation. The goal is to gain a deeper understanding of the customer's background, financial profile, and potential risk factors.
   
   
3. Enhanced Identity Verification: EDD requires more rigorous identity verification procedures compared to standard KYC checks. This may involve verifying the authenticity of identification documents, conducting enhanced checks against reliable and independent sources, and using advanced methods such as biometric verification, PEP and Sanction screening or eIDV solutions to validate the customer's identity.
   
   
4. Source of Funds and Wealth Assessment: EDD focuses on assessing the sources of funds and wealth of the customer. It involves conducting a detailed analysis of the origin of funds, assessing the legitimacy of income and assets, and evaluating the customer's business operations to ensure they align with their financial profile. The objective is to identify and mitigate the risk of money laundering or illicit financial activities.
   
   
5. Enhanced Monitoring: EDD requires implementing enhanced monitoring measures for customers undergoing the process. This includes real-time transaction monitoring, periodic reviews, and ongoing scrutiny of the customer's activities to detect any suspicious or unusual patterns. Advanced AML software or automated monitoring systems can be utilised to streamline and improve the effectiveness of this monitoring process.
   
   
6. Ongoing Review and Updating: EDD is not a one-time process but requires regular and frequent reviews of the customer relationship. This ensures the continued appropriateness of the risk classification and the adequacy of implemented controls. Organisations need to stay updated with any changes in the customer's circumstances or risk profile to maintain effective risk mitigation.

By incorporating EDD into KYC and AML checks, organisations can identify and manage the higher risks associated with certain customers or clients. It helps to prevent money laundering, terrorist financing, fraud, and other financial crimes by conducting a more thorough assessment of the customer's background, financial activities, and potential risk factors. EDD strengthens the overall risk management framework and assists organisations in complying with regulatory requirements and maintaining the integrity of their operations.

What should organisations look for in an Enhanced Due Diligence Service Provider?

When selecting an Enhanced Due Diligence (EDD) service provider, organisations should consider several key factors to ensure they receive comprehensive and effective EDD solutions. Here are some important aspects to look for:

1. Expertise and Experience: Choose a service provider with proven expertise and experience in conducting EDD for the specific industry or sector in which your organisation operates. Look for a provider that understands the complexities and unique risks associated with your business and has a track record of delivering high-quality EDD services.
   
   
2. Regulatory Compliance: Ensure that the service provider is well-versed in local and international regulations related to KYC, AML, and EDD. They should have a thorough understanding of the regulatory landscape and keep up-to-date with evolving compliance requirements. This ensures that the EDD solutions provided align with the latest regulatory standards.
   
   
3. Data Sources and Technology: Assess the service provider's access to comprehensive and reliable data sources for conducting EDD checks. They should have access to a wide range of data, including official government records, public databases, watchlists, and adverse media sources. Additionally, verify that they leverage advanced technology and data verification tools to enhance the efficiency and accuracy of their EDD processes.
   
   
4. Risk Assessment Capabilities: Look for a service provider that excels in conducting risk assessments tailored to your organisation's needs. They should have robust methodologies in place to identify and evaluate risk factors associated with customers or clients, including factors such as jurisdictional risk, political exposure, industry risk, and transaction patterns.
   
   
5. Global Coverage: If your organisation operates globally or has an international customer base, ensure that the EDD service provider can provide global coverage. They should have the capability to conduct EDD checks in various jurisdictions and possess knowledge of regional risks, regulations, and cultural nuances that may impact the assessment process.
   
   
6. Customisation and Flexibility: Each organisation's EDD requirements may vary, so choose a service provider that can customise their solutions to meet your specific needs. They should be able to tailor their EDD processes and reports to address the unique risk profiles of your customers or clients.
   
   
7. Timeliness and Efficiency: EDD processes should be conducted promptly and efficiently to minimise delays in onboarding new customers or clients. Evaluate the service provider's turnaround time for delivering EDD reports and ensure they can meet your organisation's timelines and expectations.
   
   
8. Reputation and References: Research the service provider's reputation in the market and seek references or testimonials from other organisations that have used their EDD services. Look for feedback on their professionalism, accuracy, and overall performance.
   
   
9. Data Security and Confidentiality: EDD involves handling sensitive customer data, so data security and confidentiality are paramount. Ensure that the service provider has robust data protection measures in place, including encryption, secure data transmission, and strict access controls.
   
   
10. Clear Reporting and Documentation: The EDD service provider should deliver clear and concise reports that provide a comprehensive overview of the findings, risk assessment, and recommended actions. The reports should be well-structured, easily understandable, and provide actionable insights to support your decision-making processes.

By considering these factors, organisations can select an EDD service provider that meets their specific requirements, ensures compliance with regulations, and effectively mitigates the risks associated with high-risk customers or clients.