Around $2 trillion of cash flows throughout the global financial systems despite strict measures by the government, regulation, legislation, and enforcement of advanced actions. That’s why Know Your Customer (KYC) is designed to enhance the security parameters of enterprises and financial institutions.
Due diligence software helps companies to determine the appropriate level of due diligence from the following levels; simplified due diligence, customer due diligence, and enhanced due diligence. This article defines enhanced due diligence and outlines its advantages for businesses.
What is Enhanced Due Diligence?
Enhanced due diligence is the risk-based assessment of clients and users beyond basic KYC verifications. EDD focuses on high-risk customers that do high volumes of transactions. In the banking sector, mere Customer Due Diligence (CDD) is insufficient to deal with high-risk transactions. That’s why businesses opt for Enhanced Due Diligence methodologies to ensure customer identity verification based on the risk level associated with the potential client or business. This advanced EDD helps organizations to avoid heinous threats, including money laundering and financial terrorism.
Why Enhanced Due Diligence?
All the members of the Financial Action Task Force (FATF) have to implement CDD requirements to comply with CFT/AML regulations as per the recommendations issued by FATF.
FATF recommendations also state that EDD regulations must be applied to “business relationships and transactions with natural and legal persons, and financial institutions, from countries for which FATF calls for this”.
Institutions onboarding new businesses and customers implement KYC and EDD measures if there is any risk of corruption or money laundering. Ongoing monitoring should also be a part of it since it helps businesses to keep a check on the ongoing transactions of high-risk customers.
Following are the situations where clients and businesses may require to go through the procedures of Enhanced Due Diligence:
- Non-resident clients or those who are subject to financial losses
- Countries not implementing AML/CFT regulations
- Unusual business relationships under uncertain circumstances – for instance, substantial geographical distance between the user and customer
- Countries suspicious of supporting terrorism agencies
- Private banking systems
- Anonymous business relationships or transactions that are non-face-to-face
- Cash-intensive companies and businesses
How is EDD Different from CDD?
Enhanced Due Diligence is different from Customer Due Diligence from several perspectives. CDD and EDD are both an integral part of Know Your Customer’s process. In CDD, businesses conduct the customer identification process by verifying the provided data against various databases, however, EDD goes one step ahead.
While CDD measures are designed for low-risk customers, Enhanced Due Diligence procedures are implemented on businesses and customers that pose high-risk threats, such as politically exposed individuals. While going through Enhanced Due Diligence processes, clients and businesses have to provide more information to the banks and financial procedures in order to pass the various checks of the customer verification process.
EDD in banking is a more detailed, tough, and time-consuming process compared to Customer Due Diligence. An exact EDD procedure may vary from institution to institution, however, every bank or financial institution has to follow the basic KYC standard issued by the Financial Action Task Force. It suggests that banks must verify the source of funding of their customers, must ensure ongoing monitoring to identify suspicious transactions and keep a detailed record of everything during the decision-making process.
Executing EDD KYC Process
As per the recommendations issued by the Financial Action Task Force, businesses and financial companies must ensure compliance with Enhanced Due Diligence regulations. Below is the checklist to kickstart the KYC EDD process:
- Implementing Risk-Based Strategies
Implementation of risk-based processes assists businesses in detecting and identifying risk factors associated with users and businesses. It involves identifying several factors, including the user’s country of country and type of business.
- Gathering Additional Credentials
Creation of a checklist for AML/CFT compliance for high-risk consumers. It is beneficial to obtain all the relevant data from clients.
- Analyzing the Sources of Funds
Businesses must identify and verify the source of origin of the user’s wealth. It is imperative for companies to verify the financial and non-financial assets of their customers. Inconsistency and irregularity between the user’s earnings and source of wealth must be detected and verified.
- Monitoring Ongoing Transactions
Banks and financial institutions must check the history of the transactions of their customers. Moreover, companies must be aware of transaction details, such as the purpose and nature of transactions.
- On-site Visiting
Onsite visit to verify the addresses physically is also an integral part of enhanced due diligence. However, it is dangerous to continue business with customers whose provided information, such as different physical addresses from provided addresses.
- Development of Strategy for Ongoing Risk-Based Monitoring
Constant monitoring of high-risk customers is a time-consuming process. That’s why a strong ongoing monitoring strategy is needed to identify and curb suspicious transaction activities.
The Bottom Line
Advanced AML/CFT compliance solutions, such as implementing Enhanced Due Diligence processes, are mandatory to benefit firms. By implementing advanced machine learning algorithms in KYC EDD processes, businesses can effortlessly identify high-risk customers to safeguard themselves against financial and credibility losses.