Enhanced due diligence (EDD) is a set of additional checks regulated firms must undertake as part of their Anti-Money Laundering (AML) requirements if a customer is identified as high-risk.
Effective due diligence can prevent financial crime and help minimise the risk that could arise from doing business with certain customers.
In this article, we answer some frequently asked questions about enhanced due diligence.
What is enhanced due diligence (EDD)?
Enhanced due diligence (EDD) is an extension of a company’s Know Your Customer (KYC) and customer due diligence (CDD) checks that involves further investigation of a client or customer who has been identified as being at greater risk of being involved in money laundering activities.
EDD is a crucial compliance obligation for financial institutions and other businesses that fall under the Money Laundering Regulations 2017 (MLR 2017).
Which customers might require EDD?
Customers could be flagged as high-risk for various reasons, including:
- If they have connections with higher-risk business sectors, such as the arms trade or the gambling industry.
- If they have links to a high-risk country.
- If they have unnecessarily complex or opaque beneficial ownership structures.
- If they make transactions that are unusual, lack an obvious economic or lawful purpose, are complex or large, or might lend themselves to anonymity.
- If they provide false or stolen identification documents or information.
The MLR 2017 also require EDD measures to be undertaken in situations where:
- The customer is not present.
- In correspondent banking relationships where the correspondent bank is outside the European Economic Area.
- If the customer is a Politically Exposed Person (PEP) or is a known associate of a PEP.
What is a Politically Exposed Person (PEP)?
A Politically Exposed Person (PEP) is an individual whose prominent position in public life may make them vulnerable to corruption. The definition extends to immediate family members and known close associates.
The full definition of a PEP is set out in the MLR 2017.
Not all high-risk customers are necessarily involved in criminal activity. Rather, being flagged as a high-risk customer means there is a higher risk that warrants closer attention.
What additional checks are involved in EDD?
Enhanced customer due diligence requires businesses to:
- Seek additional independent, reliable sources to verify information provided or made available to the relevant person.
- Take additional measures to better understand the background, ownership and financial situation of the customer and other parties to the transaction.
- Take further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship.
- Increase the monitoring of the business relationship, including greater scrutiny of transactions.
This might involve companies taking such steps as:
- Obtaining additional verification documentation.
- Researching a customer’s business or political associates, beneficiaries and other contacts more thoroughly.
- Checking for negative media coverage.
- Tracking transactions.
- Establishing the origin of funds.
- Collecting beneficial ownership information.
How often is enhanced due diligence required?
EDD checks can be triggered at any point during a business relationship. This includes, for example, if there is a significant change in customer behaviour, a transactional anomaly, or a sudden appearance on a watch list.
To stay compliant, regulated firms should take a risk-based approach to their due diligence requirements and introduce EDD checks in accordance with the level of risk a customer poses at any particular point.
Any enhanced verification procedures should be proportionate to the level of risk identified.
Why are EDD checks important?
The extra information gathered during EDD checks helps businesses establish a proportionate response to the higher level of risk posed by such customers. It supports them in making a responsible decision about how they will interact with them.
What happens if a firm does not comply with EDD requirements?
Firms that do not comply with EDD or CDD obligations run the risk of inadvertently being conduits for money laundering and other financial crimes. They also face fines, imprisonment, and reputational damage for not following the correct procedures.
All regulated firms should comply with their due diligence requirements and review their processes on a regular basis.
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A review of this nature provides valuable insight into a business when performed correctly. Along with an overview of risk, these crucial assessments also highlight issues within the business, so it is essential to undertake a proper review. All of a company’s building blocks must be considered, including its staff, clients, operations, and finances.
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