The Enhanced Due Diligence (EDD) process takes regular Customer Due Diligence measures to the next level. As a key element of Anti-Money Laundering (AML) regulations and Know-Your-Customer (KYC) procedures, Enhanced Due Diligence allows organisations to effectively manage risks, maintain regulatory compliance, and foster trust with stakeholders.
What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence, or EDD for short, is a rigorous security process that involves evaluating and monitoring high-risk customers or transactions to ensure compliance with Anti-Money Laundering (AML), Counter-Terrorism Financing (CTF) and other regulatory requirements. It's an advanced level of customer verification that goes beyond the standard Customer Due Diligence (CDD) process.
Identifying high-risk customers
As part of the standard Customer Due Diligence procedures, organisations complete a risk assessment to determine the level of risk each customer poses. If a client is identified as a high-risk customer, they're subject to more stringent due diligence procedures.
High-risk customers represent a category of individuals or entities that pose an elevated risk of being involved in financial crimes, such as money laundering, fraud or terrorism financing. They're often classified based on a range of factors, including specific geographical, transactional and personal characteristics, including:
High-risk jurisdictions: Individuals or legal entities located in countries with weak anti-money laundering (AML) regulations, high levels of corruption or known terrorist financing activity are typically considered high-risk.
Politically exposed persons (PEPs): A politically exposed person (PEP) is an individual with a prominent public position, like the head of state, minister or senior judicial officer, or their close associates and family members. PEPs are at a higher risk of engaging in bribery or corruption due to their access to resources and influence.
Cash-intensive businesses: Due to the large volume of cash transactions they handle, businesses like casinos, car dealerships, and real estate agents are more susceptible to money laundering. Because of this, they're often subject to Enhanced Due Diligence procedures.
Negative histories: Customers with known links to financial crimes, sanctions or adverse media coverage are typically considered high-risk.
Common red flags
Other than the above categories that are typically used to identify high-risk customers, there are several red flags that tend to indicate suspicious behaviour:
Suspicious transactions: Large or inconsistent transactions that don't align with a customer's risk profile.
Complex ownership structures: The use of shell companies, trusts or layered corporate entities to obscure ownership and control.
High-risk products or services: Engaging in high-risk activities, like cryptocurrency trading, international remittance or offshore investments.
Understanding the traits and behaviours of high-risk customers can better position businesses to implement Enhanced Due Diligence (EDD) measures to mitigate potential financial crimes and ensure compliance with regulatory standards.
Comprehensive Procedures for Enhanced Due Diligence (EDD)
Like standard Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) begins during customer onboarding. It involves a series of detailed steps that help businesses identify, assess, and manage the risks posed by high-risk customers or transactions. However, unlike CDD, the EDD process provides a more thorough understanding of a customer's identity and the intended nature of the business relationship.
Here's how to conduct Enhanced Due Diligence.
Customer identification and verification
As part of the Enhanced Due Diligence (EDD) process, businesses must collect extensive identification documents, including passports, utility bills, bank statements and business registration documents (for corporate clients). These documents are then verified against trusted databases, official government records or third-party verification services to ensure accuracy.
Businesses must also verify the legitimacy of a customer's funds and wealth. This can involve tracing financial transactions, reviewing tax records or requesting supporting documents for large transactions.
Risk assessment
The Enhanced Due Diligence process takes a risk-based approach, meaning customers and legal entities are assessed based on the level of risk they pose.
Once enhanced identity verification has been completed, businesses must then assign risk levels based on several critical factors, including their country of residence, industry, transaction volume and relationships with politically exposed persons (PEPs). When it comes to corporate entities, businesses also assess ownership structures and beneficial ownership to identify hidden risks before establishing a business relationship.
By using an advanced risk assessment process, businesses can provide reasonable assurance that they've adequately assessed their customer's risk profile.
Third-party screening
Customers are screened against global sanctions lists, such as those maintained by the United Nations, OFAC (Office of Foreign Assets Control), and local authorities. Special attention is given to individuals holding public office or those closely associated with them because they are more susceptible to corruption risks.
It's at this stage that businesses also conduct verifiable adverse media searches to identify negative information, such as prior involvement in criminal activity, like fraud, money laundering and terrorist financing.
Ongoing transaction monitoring
Enhanced Due Diligence measures require businesses to track a customer’s transactions regularly to identify patterns, anomalies or suspicious activity. High-risk customers undergo periodic assessments to update their risk profile and ensure compliance with regulations. Specific triggers, like unusual transaction amounts or inconsistent activity, prompt immediate Enhanced Due Diligence reviews.
Enhanced reporting and documentation
All steps of the Enhanced Due Diligence process must be documented meticulously to demonstrate compliance with regulatory requirements. Any suspicious transactions must be reported to the relevant financial authorities (EG. AUSTRAC in Australia) for further investigation. By following Enhanced Due Diligence processes, businesses can ensure there's a comprehensive audit trail for all high-risk customers and transactions.
Advanced identity verification tools, like Data Zoo's identity and business verification systems, help streamline EDD processes, making them faster and more accurate. Through the integration of multiple data sources, businesses can quickly and comprehensively analyse customer profiles.