Last updated on November 30th, 2023 at 12:38 pm
In today’s rapidly evolving financial landscape, safeguarding against illicit activities and minimizing risk is of paramount importance for financial institutions. Enhanced Due Diligence (EDD) is a critical component in the fight against financial crimes and provides an extra layer of protection during the KYC/AML process. This blog post aims to shed light on what EDD entails, why financial companies need to implement it, and when it is required.
Understanding enhanced due diligence
Due diligence refers to the process of conducting a thorough investigation and risk assessment before entering into a business relationship or transaction. Enhanced Due Diligence takes this process to a higher level by scrutinizing certain high-risk individuals, entities, or transactions more intensely.
Enhanced Due Diligence (EDD) is an integral part of the Know Your Customer (KYC) process. KYC refers to the set of procedures and measures that financial institutions implement to verify and assess the identity, suitability, and potential risks associated with their customers.While KYC establishes the foundation for customer onboarding and ongoing monitoring, EDD represents an advanced level of due diligence applied to customers or transactions with higher inherent risks. EDD builds upon the standard KYC procedures by conducting a more in-depth analysis and gathering additional information.
Initially, financial institutions conduct standard KYC procedures, which involve collecting essential customer information, such as identification documents, proof of address, and other relevant data. This helps establish the customer’s identity, assess their risk profile, and comply with regulatory requirements. Once the basic KYC information is gathered, financial institutions perform a risk assessment based on predefined risk factors, such as customer type, nature of business, country of origin, or industry sector. This helps categorize customers into low, medium, or high risk.
Customers or transactions that are deemed to have a higher risk profile based on the risk assessment may trigger the need for EDD. These triggers include dealing with politically exposed persons (PEPs), high-value transactions, customers from high-risk jurisdictions, or customers involved in high-risk industries. These flags are typically determined by running the individual’s information through some type of third party check.
When enhanced due diligence is required
Financial institutions are advised to perform EDD on customers or entities with higher inherent risks, such as PEPs, those with complex ownership structures, non-residents, or businesses operating in high-risk sectors like gambling, precious metals, or cryptocurrencies. Enhanced due diligence is also often warranted for unusually large or complex transactions. This ensures that the source of funds is legitimate, the transaction aligns with the customer’s known profile, and there are no signs of potential financial crimes. Additionally, Operating in or dealing with customers from high-risk jurisdictions with weak AML/CTF controls may require heightened due diligence to mitigate associated risks.
Implementing enhanced due diligence measures
Financial companies should provide a wraparound approach to enhanced due diligence. Implement stringent procedures to verify customer identities, including thorough document verification, identity checks against reputable databases, and conducting negative news searches. Validate the legitimacy of a customer’s source of funds, ensuring they are derived from legal and legitimate activities. This may involve reviewing bank statements, business records, or engaging external experts. Provide comprehensive training to employees on recognizing red flags to trigger the enhanced due diligence process.
All of these methods can be accomplished by IDScan.net’s digital identity verification API. By incorporating EDD within the broader KYC framework, financial institutions can effectively identify and mitigate risks associated with high-risk customers, transactions, or jurisdictions. This helps strengthen the integrity of the financial system and protect against financial crimes.