Enhanced due diligence (EDD) is an extension of know your customer (KYC) and customer due diligence (CDD) that applies when high-risk prospects and customers, who may be involved in money laundering, have been identified. This article explains how EDD works, who it applies to, why compliance is critical, as well as introducing some ways in which you can implement it to protect your business and mitigate the risk of money laundering.
In financial services and related industries, EDD is a regulatory requirement to dig deeper into the financial credentials of current or potential customers who are politically exposed (PEP), have links to a high-risk country, or otherwise present a higher risk of terrorist financing or money laundering.
The EDD process is part of anti-money laundering (AML) regulations. EDD goes beyond the scope of checks conducted for KYC and CDD to establish whether customers identified as high-risk may be involved in money laundering activities such as sanctions-busting or terrorism funding.
EDD regulations apply to any business or organisation subject to financial regulations or supervised by the Financial Conduct Authority (FCA).
Enhanced due diligence involves deeper research and broader checks into a customer — including their business or political associates, subsidiaries, beneficiaries and other relevant contacts. Such deep exploration may include probing media sources for negative news, checking against terrorist, fraud and litigation databases, and gathering extra information to support a responsible decision.
Financial services organisations must have robust AML controls in place to comply with regulations. Failure to comply can result in fines, revoked licenses, reputational damage and prison sentences for those responsible.
By performing the research and verification process and recording the findings of EDD on potential or current customers who have been identified as high risk, a business can demonstrate the steps taken to comply with regulations.
To stay compliant, EDD search and verification checks should be performed annually, on contract renewal, or anytime material changes occur on the customer's profile. For instance, an appearance on a watchlist, a significant new piece of business, a complex financial transaction, or any noteworthy change of behaviour or transactional anomaly.
In part, using solutions like online document verification and facial biometrics that utilise elements such as data and selfie capture and one-to-many matching — to implementing predictive fraud alerts and behavioural models (e.g. a mule’s model) to support deeper investigations — will no doubt be beneficial in terms of a consistent, more informed, operationally efficient approach to conducting investigations with quick responses and outcomes for the customer — ultimately reducing the likelihood of customer drop out. However, due to the complexity of EDD, human interpretation and expertise is key, so there’s only so much streamlining that can be implemented.
Enhanced due diligence is part of your AML requirements that’s triggered when a prospect or customer is identified as high risk as a result of your KYC and/or CDD checks. EDD requires financial companies to conduct a deeper investigation including research and verification into the individual, to ascertain whether it’s safe and appropriate to conduct business with them. Complying with EDD is not optional, it’s necessary — and it’s not a one-off but rather a continuous process. There are benefits to be had by streamlining elements of your EDD journey such as completing Document Verification checks in near-real time and having proactive behavioural models in place to aid decisioning. But remember, these are complimentary to existing human analysis of EDD and not a replacement.
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