Enhanced Due Diligence (EDD): Onboarding High-Risk Customers

Enhanced Due Diligence (EDD) procedures protect businesses when onboarding customers who have been identified as high-risk. EDD finance checks involve stricter verification methods than standard Customer Due Diligence (CDD). They may be required for certain customers, such as foreign government officials or large cash transactions, and serve to strengthen protection against fraud and money laundering.

Here we’ll cover what you need to know about Enhanced Due Diligence and how to do it:

  • First, we’ll start by defining just what Enhanced Due Diligence entails and how it differs from standard Customer Due Diligence.
  • Then, we’ll consider why EDD in banking is important and review when it’s required.  
  • Finally, we’ll walk you through how to perform Enhanced Due Diligence step-by-step and show you how you can use automation to expedite the process.

What is Enhanced Due Diligence?

Enhanced Due Diligence is a stricter type of Customer Due Diligence performed when a new customer or transaction has been identified as high-risk. For example, EDD checks may be used when a new client is located in a country with a high risk for money laundering or when a customer is operating in a cash-intensive industry or making a large cash transaction.

EDD procedures expand on standard Customer Due Diligence procedures required of all covered financial institutions to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. They strengthen standard CDD checks by taking additional steps such as analyzing business clients to identify hidden ownership behind interlocking corporations. They are required for certain customers and may be implemented as a best practice to strengthen security even when not strictly required by law.

How Is Enhanced Due Diligence Different from Customer Due Diligence?

Enhanced Due Diligence is stricter than standard Customer Due Diligence. It is performed after standard CDD checks have identified a customer or transaction as high-risk. EDD differs from standard CDD in a few key ways:

  • The risk level involved
  • The applicable regulatory requirements
  • The procedures and documentation

With respect to risk level, basic CDD is required of covered financial institutions for all customers. In contrast, EDD only is required for customers who meet specific high-risk criteria. For example, when a customer is located in a high-risk country, operating in a high-risk industry, making a large cash transaction, or classified as a senior foreign political figure at risk of bribery (Politically Exposed Person or PEP).

With respect to regulatory compliance, compliance for CDD involves requirements in four main areas:

  • Identifying and verifying customer identity
  • Identifying and verifying the ultimate owners or controllers (Ultimate Beneficial Owners or UBOs) of companies opening accounts
  • Understanding the nature and purpose of customer relationships
  • Ongoing monitoring of transactions and updating of customer information

EDD applies stricter checks and documentation in these areas. Enhanced Due Diligence requires:

  • Collecting more information and evidence to verify customer identity and address and assess risk (in regulatory language, the collection process must be more “rigorous and robust”)
  • Documenting the due diligence process in greater detail to record how information was collected and confirm the authenticity of verifying sources
  • Following all steps to make a professional judgment as to authenticity and risk (“reasonable assurance”)
  • Screening politically exposed persons for risk

These procedures go above and beyond what is involved in standard CDD, making EDD the highest level of due diligence organizations can conduct.

Why Is Enhanced Due Diligence Important?

Enhanced Due Diligence provides additional protection for high-risk customers and transactions. This is important for several reasons:

  • Ensuring regulatory compliance, such as Enhanced Due Diligence BSA (Banking Secrecy Act) compliance and enhanced due diligence AML (Anti-Money Laundering) compliance
  • Preventing fraud and money laundering
  • Protecting companies from losses and liability on large transactions
  • Building a positive company reputation for protecting customers

These benefits make Enhanced Due Diligence desirable even in some situations where it may not be legally required and essential when compelled by law.

When Is Enhanced Due Diligence Required?

AML Enhanced Due Diligence is required for specific high-risk scenarios, including:

  • Corporate clients conducting business through shell companies
  • Clients located in countries designated as high-risk
  • Politically exposed persons and their family members
  • Organized criminal activity involving financial components, such as fraud
  • Terrorism
  • International sanctions
  • Certain industries which deal in high volumes of cash transactions, such as gambling
  • Transactions exceeding designated thresholds

Specific legal requirements vary by jurisdiction and industry, so check with your legal team to ensure compliance. Your company also may establish internal requirements which go beyond legal minimums.

How To Perform Enhanced Due Diligence

EDD is an ongoing process that involves seven distinct steps:

  1. Identifying customer risks
  2. Consulting Enhanced Due Diligence checklists
  3. Analyzing customer sources of funds and Ultimate Beneficial Owners
  4. Monitoring ongoing financial transactions
  5. Conducting adverse media and negative checks
  6. Conducting in-person site visits
  7. Reporting on findings and developing strategies for ongoing monitoring

Let’s look at what these steps involve:

Step 1: Identify Customer Risks

The first step is identifying whether a customer or transaction represents a risk warranting Enhanced Due Diligence. This can be done using standardized criteria to review customer applications and transactions. Using automation to flag risks will optimize the efficiency of this step.

Step 2: Consult Your Enhanced Due Diligence Checklist

Once a risk has been identified, the next step is to review the situation using a checklist representing your standard operating procedures. Automating the checklist review process will speed up this step.

Step 3: Analyze Customer’s Source of Funds and Ultimate Beneficial Ownership (UBO)

In some cases, your standard procedures will call for analyzing the customer’s source of wealth and identifying their Ultimate Beneficial Owners. This involves steps such as collecting official business documents from the client, comparing these with official registries for accuracy, identifying UBOs, and performing KYC checks on each UBO. Done manually, this can be a lengthy process. Automated tools such as Optical Character Recognition (OCR) can accelerate the process of analyzing documents.

Step 4: Ongoing Monitoring of Financial Transactions

Initial checks must be followed up with ongoing due diligence. This includes monitoring transactions as well as periodically confirming and updating customer information.

Step 5: Adverse Media and Negative Check

Sometimes checking news sources and social media can uncover known risks. For example, an individual may have a known history of criminal activity. Adverse media checks, also called negative media checks, review digital and traditional sources to uncover such negative information. Once uncovered, such information also should be reviewed for accuracy. This can be done manually, but to ensure no important sources are overlooked, automated checks are recommended.

Step 6: In-Person Site Visit

Some situations may call for in-person site visits. For instance, visual confirmation of an individual’s identity or a company’s address may be needed. In some cases, this function may be handled remotely using tools such as AI-powered biometrics checks.

Step 7: Report on Your Findings and Develop a Strategy for Ongoing Monitoring

After conducting the previous steps, the final step is to create a report on your findings and develop a strategy laying out what monitoring procedures need to be implemented going forward. This should be done for individual clients, and you also can periodically review your procedures as a whole to make ongoing adjustments and improvements.

Automate Your EDD Risk-Analysis and Identity Verification with Incode

Enhanced Due Diligence provides additional protection when onboarding high-risk customers by triggering stricter verification procedures such as analyzing fund sources, monitoring ongoing transactions, and researching negative news items. These additional procedures can consume significant time. Fortunately, choosing the right automation can help you perform enhanced due diligence more efficiently.

Incode’s AI-powered identity verification platform helps you streamline EDD checks by providing automated risk control checks, fraud risk databases, and transaction monitoring tools. You can customize your workflows to set risk levels tailored for specific needs and industries. Request a demo to see how Incode can help you automate your Enhanced Due Diligence procedures to speed up your workflow and deliver faster service without sacrificing security.

 

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