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Enhanced Due Diligence

01 December, 2023

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According to compliance guidelines for anti-money laundering and counterterrorism funding, regulated institutions must take the necessary actions to determine and evaluate each customer’s risk of money laundering and terrorist financing. Since 2000, regulators have fined financial institutions around $38.47 billion, $21.47 billion for AML violations, and $16.9 billion for sanctions-related offenses. 

Organizations should conduct a series of investigations as part of the customer onboarding process to enable them to recognize possible financial crime threats. Then, various due diligence can be carried out as part of a risk-based approach. Learn how EDD operates, who it affects, how substantial compliance is, and how to implement it to safeguard companies and reduce the danger of money laundering.

What is Enhanced Due Diligence (EDD)

When high-risk clients and potential clients who may be implicated in money laundering are identified, enhanced due diligence (EDD) is applied as a continuation of Know Your Customer (KYC) and Customer Due Diligence (CDD). Regulating these individuals’ transactions is crucial due to state-based security issues. With the assistance of the Bank Secrecy Act (BSA), the Patriot Act of 2001 made EDD a required process.

Under the Patriot Act, private insurance companies, offshore banks, and subsidiary accounts were required to abide by rules and regulations about customer and client due diligence. These regulations are essential since they must have lots of evidence and accurate data.

EDD procedures must be documented throughout the account setup and client risk assessment phases. Authorities can thus access data that qualified data analysts handle. The document analyzes suspicious activities, laws against money laundering, and other unusual transactions.

When is Enhanced Due Diligence Required?

Enhanced Due Diligence processes must be used by businesses when transacting with the following entities or people:

  • Politically Exposed Persons (PEPs) or those in their immediate circles, including friends or family members, 
  • any company operating in a nation included on the list of high-risk third countries,
  • businesses in industries where money laundering is more likely, like gaming or gambling;
  • shell companies;
  • ultimate beneficiaries,
  • businesses that have been blacklisted and financed terrorism;
  • private and correspondent banking.

A Step-by-Step Guide to Conduct EDD

Firms are expected to conduct EDD to thoroughly analyze and document potential risk if the initial checks have been done and high-risk factors have been detected (such as the individual being a Politically Exposed Person, or PEP, or the corporation being a cash-intensive business). Businesses must implement risk-based EDD procedures considering every customer’s unique AML/CFT risk. These are:

  • Acquiring extra materials for customer identification,
  • determining the origin of money,
  • examining a transaction’s goal or the nature of the business relationship more closely;
  • putting in place continuous monitoring protocols.

From Individual

Risk indicators for financial crimes include corruption, money laundering, other illegal activities, and adverse media coverage. Information on corporate affiliations, appointments, and the source of wealth (SOW).

From Corporate 

Details about the history and operations of the business, ultimate beneficial owners (UBO), directors, officers, and senior management. It also includes information about directors and shareholders and markers of financial crime risk, such as money laundering, corruption, or other illegal activity, in addition to negative media.

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FATF Requirement for Enhanced Due Diligence

FATF recommends the following concrete steps towards EDD:

  • Acquiring more identifying data from a wider variety of trustworthy, independent sources,
  • Carrying out more searches (such as verifiable adverse media searches, AML or PEP screening)
  • Requesting an intelligence report on the client or beneficial owner to learn whether they are engaged in illicit activity,
  • Verifying the source of funds or riches in a business partnership,
  • Asking the customer for further details about the goal and nature of the relationship.

The FATF then advises the institutions to implement a risk-based monitoring plan to identify suspicious activity or modify that customer’s risk profile.

Enhanced Due Diligence AML Requirements 

Businesses are usually required by CDD requirements to keep records of the data they gather for at least five years. This comprises copies of all official documents used for identification (passports, birth certificates, driver’s licenses, etc.) and official business documents. 

Companies must be able to respond to regulatory requests for documents in a timely and effective manner so that authorities may reconstruct specific transactions, including the particular quantities and kinds of currency involved. 

Regulations and EDD Requirements

Local jurisdictions will have different regulatory obligations, so businesses should confirm where they operate.

Companies must swiftly disclose any suspicions or reasonable reasons to believe that a customer is participating in criminal behavior raised by EDD measures to their jurisdiction’s financial intelligence unit (FIU) by filing a suspicious activity report (SAR).

Businesses based in a nation designated as a high-risk third country in Europe are required to obtain EDD, according to Article 18 of 4AMLD. A detailed investigation must also be conducted on politically exposed persons (PEPs), close acquaintances, or family members.

Additionally, all jurisdictions must stay current on the ever-changing AML sanctions. Businesses must do routine screenings to ensure the clients are not on watch lists. In many regions of the world, industries like casinos, which are more likely to be involved in money laundering, also frequently have enhanced due diligence requirements. According to US FinCEN advice, the scope of due diligence procedures would vary case-by-case.

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