CDD vs EDD: Know When to Go Beyond Basic Due Diligence16 April, 2025 6 minutes read Both customer due diligence (CDD) and enhanced due diligence (EDD) are regulatory requirements that are prerequisites for ensuring AML compliance and help with risk management and mitigation.These concepts may sound similar, but there is quite a difference between the two, especially if we consider what their individual protocols are, why both practices are required, and when to go for EDD.Whenever a business develops a relationship with another entity (customer or business), there is a certain level of scrutiny that is mandatory to avoid getting into the risk of dealing with entities prone to violations of AML regulations.What is Customer Due Diligence (CDD)?Customer due diligence is one of the integral components of meeting the Know Your Business (KYB) requirements. It is a part of an organization’s risk management strategy required by laws and regulations like the Anti-Money Laundering (AML) and the Bank Secrecy Act (BSA). CDD is typically conducted when establishing a new business relationship, carrying out occasional transactions, or generally when transactions are involved or when there is a suspicion of money laundering. While conducting CDD, financial institutions collect and then verify crucial information about a client.For example, during business onboarding, implementing CDD as a part of KYB, the following documents of the customer will be collected:Full legal/registered nameDate of birth and a valid picturePassport, national ID, and driver’s licenseContact number and emailCertificate of incorporationBusiness/trade licenseTax identification numberArticles of associationProof of registered business address (bill, lease agreements)After collecting these documents, businesses assess the customer’s risk level. This involves analyzing their financial and business activities.One of the important steps to note here is that in CDD, the customer data is not only under scrutiny but also extends to checking data against public and government databases, including sanctions lists, company listings, adverse media, and PEP lists.What is Enhanced Due Diligence (EDD)?After developing the customer’s risk profile, the risk score that is assigned determines the level of due diligence required. It involves an intense level of scrutiny called enhanced due diligence (EDD). The extent to which due diligence is conducted depends on the customer’s risk level. In usual scenarios, standard CDD is sufficient for basic or low-risk profiles. However, that may not always be the case, as sometimes a UBO, for example, may be a politically exposed person (PEP) or may be an individual from a sanctioned jurisdiction.Implementing this risk-based strategy enables businesses to safeguard customer relationships and assets and ensure EDD compliance.CDD vs EDD: When Basic Checks Aren’t EnoughCDD and EDD are both integral components of risk mitigation and AML compliance programs in financial institutions. While both regulatory practices are implemented to avoid the risks associated with the illegitimate customers, the latter differs slightly based on depth, scope, and intent.Depth:Contrary to the CDD, which typically involves collecting a customer’s basic data to create a risk profile, EDD digs deeper into the customer’s profile. In businesses where a customer is an ultimate beneficial owner (UBO), enhanced due diligence evaluates the risk associated with them. Ensuring a comprehensive investigation is an essential regulatory requirement, as it peels through the complex ownership structures and helps financial institutions know when a customer’s risk level is higher than usual.With existing customers who have the potential to become high-risk entities in the future, ongoing monitoring through EDD is also beneficial for avoiding future risk and penalties.Scope:In terms of scope, EDD goes beyond basic checks to manage high-risk business persons that may be involved in various types of financial crimes such as money laundering, terrorist financing, or regulatory non-compliance. UBO identification is a non-negotiable thing in enhanced due diligence. The decision to apply EDD or CDD in the context of UBOs lies in their risk level. For example, if a customer is a high-risk politically exposed person (PEP), owns a substantial amount of wealth, or has an intricate financial profile, the business should use EDD to get a full picture of the customer’s historical records and financial activities.Intent:Unlike basic due diligence, the intent of EDD is to identify and mitigate high levels of risk by scrutinizing factors such as complex ownership structures, involvement of UBOs, or links to high-risk jurisdictions. In addition to that, since CDD only aims to collect and verify basic customer data, in EDD, detailed documentation of a customer is scrutinized, ultimately helping in the meticulous verification of the company’s integrity.For example, it not only supports customer onboarding but also enhances supplier chain due diligence for fintechs, by providing comprehensive director checks and screening names against sanctions lists and adverse media, helping them understand the risk associated with their partners.How The KYB’s Approach to CDD and EDD Can Help Your BusinessThe KYB facilitates both CDD and EDD processes by offering quick, document-supported evaluations from official registers and non-public databases. For CDD, it allows for business or entity verification, business register checks, license verification, and document acquisition under one roof. Our platform ensures that companies are able to instantly check the validity of an entity before onboarding.Where EDD is needed, we provide sophisticated features such as financial performance analysis (balance sheets, income statements, and cash flows), Ultimate Beneficial Owners (UBOs) identification, and visualization of intricate ownership structures.Unlike traditional data sources, The KYB provides a comprehensive due diligence report much faster. This comprises extensive company information, underlying risk indicators, and observations that are usually overlooked in regular verification exercises.Our platform aims to assist companies and financial institutions in reducing onboarding delays, ensuring AML/CFT compliance, and meeting regulatory requirements across various jurisdictions.Regardless of whether performing third-party screening, investor due diligence, or adding a new vendor, The KYB allows companies to use the right amount of scrutiny, fueled by validated data sources directly and in real time from the official registry. What this means is that our enhanced due diligence not only digs deep into a business entity’s profile but also checks for direct and indirect sanctions, identifying whether the entity is explicitly listed or associated with a sanctioned individual or organization through ownership, control, or business ties.Get in touch for a comprehensive, automated CDD and EDD solution tailored to your specific compliance needs. Our services simplify Know Your Business (KYB) checks, helping you stay compliant, reduce onboarding friction, and protect your business from potential risks.
What is Enhanced Due Diligence? A Comprehensive Guide22 December, 2023 7 minutes read Business transactions always hold the risk of illicit financial activities, particularly when they occur at the global level. According to the UK’s National Crime Agency, businesses, financial sectors, and the public face fraud of €219 Billion annually. In fact, only the United Kingdom has to bear the loss of €115 Billion every year. In this regard, the Financial Action Task Force (FATF), the Financial Conduct Authority, and the FinCEN develop specific regulations requiring companies and financial institutions to comply. These globally working regulatory authorities impose Enhanced Due Diligence (EDD) solutions on businesses to address high-risk companies and large-volume transactions. This article explores Enhanced Due Diligence and its significance in the financial sector to prevent fraud and financial crimes.What is Enhanced Due Diligence? A Quick OverviewEnhanced Due Diligence surpasses standard due diligence methods by providing a more thorough and rigorous approach to business identification, verification, and risk assessment. EDD is often used in commercial settings to reduce the possible legal and financial risks connected to illegal activity. Additionally, it is typically applied to high-risk clients or business partnerships. Most banking regulations, such as those in the United States about Know Your Business (KYB) and Anti-Money Laundering (AML), are based mainly on EDD.Significance of Enhanced Due DiligenceThe financial security issues may vary from region to region. Hence, regulating all business transactions is essential to combat the challenges like financial crimes. Nevertheless, with the assistance of the Bank Secrecy Act, EDD was mandated by the Patriot Act in 2001. Its laws and rules are considered essential because they need a significant amount of evidence and accurate information. Especially throughout the account creation and business risk assessment phases, the EDD process has to be meticulously documented.Role of EDD in Banking SectorAn essential part of the KYB compliance process in banking is EDD. It comprises obtaining data to verify the identity of businesses and estimate the level of money laundering risk each company presents. Hence, the companies provide consolidated information during the EDD process, eventually reducing the risk. The FATF recommends the following achievable actions for EDD in the banking sector:Acquiring more identifying data from a wider variety of trustworthy and impartial sourcesConducting more searches (such as negative media searches)Analyzing the intelligence report of the company or beneficial owner to investigate if they are engaged in any illicit activityChecking the source of income or resources in a business ventureGetting additional details about the nature and goal of the business relationshipImplementing a risk-based monitoring system to identify any suspicious activity or modifications to the customer’s risk profileWhen is It Necessary to Conduct Enhanced Due Diligence?In general, Enhanced Due Diligence should be carried out when establishing new business connections and during continuous monitoring to stay informed about any changes in risk exposure. However, other triggering situations may put companies at higher risk and need advanced screening. The takeaway is to consider risk management constantly. Businesses and Financial Institutions (FIs) can discover their exposure to various dangers and risk levels that vary based on the kind of firm they work for and the third parties they do business with. In the following four phases, we’ll review the specific situations when Due Diligence may be required by law:Politically Exposed Persons (PEPs)PEPs are individuals holding influential political positions and can be readily misused for the goal of money laundering or corruption. Therefore, Enhanced Due Diligence is necessary when PEPs are involved. Of course, this does not imply that all PEPs are dishonest. Businesses need up-to-date details regarding PEPs, such as their address and identity papers, while evaluating them to comply with AML (Anti-Money Laundering) compliance and EDD regulations. Furthermore, to create a risk profile, companies must enquire about the residence of PEPs, their affiliations with high-risk families, and the organizations they participate in. Searching on the internet and social media platforms helps further identify whether there are any active investigations against them and examine their media coverage. A PEP’s status may be ascertained by consulting PEP listings that some nations make available. Additionally, it is possible to examine the internal PEP databases of some firms. High-Risk JurisdictionsHigh-risk countries could not have robust enough Anti-Money Laundering (AML) policies and processes or have an unstable or unpredictable economy. Hence, companies are at a heightened risk of money laundering. Global efforts to combat corruption and money laundering are centralized under the Financial Action Task Force (FATF). Around the globe, AML laws are in place to aid in detecting suspicious conduct. Since high-risk businesses, industries, or nations might increase the risk of money laundering, completing Enhanced Due Diligence is essential to comply with AML legislation requirements.PenaltiesVerifying the government’s sanctions list is a mandatory regulatory need for your improved due diligence activities. The Ultimate Beneficial Owners (UBOs) with the highest stake must be reviewed during the OFAC screening process. Additionally, companies cannot lawfully do business if a corporation is controlled 50% or more by a person or entity on the sanctions list, according to the OFAC 50 Percent Rule. Enhanced Due Diligence becomes pertinent upon discovering sanctioned businesses with a significant stake (not nearly 50%) in the third-party entity. Nevertheless, companies may have to pay hefty fines when found guilty of association with high-risk businesses.High-Risk IndustriesCompanies operating in high-risk sectors like real estate, banking, mining, oil and gas, or gaming, where large sums of money and high net-worth transactions are involved, require due diligence procedures. Nevertheless, businesses can conduct Enhanced Due Diligence checks and be subject to various laws depending on their industry. For example, the Bank Secrecy Act (BSA) provides a basic structure for the AML checks that financial institutions and broker-dealers must perform while partnering with other clients or businesses. How to Perform EDD?A thorough Enhanced Due Diligence process requires the following steps:Determining High-Risk BusinessesInitially, organizations evaluate each client’s risk profile by looking at affiliations, transaction type, geography, and employment, among other things. Businesses that represent a high risk to the industry might be politically exposed people (PEPs), residents of high-risk countries, or operating in sectors where fraud and money laundering are more common.Information GatheringCompared to standard due diligence, Enhanced Due Diligence necessitates collecting more thorough business data. The sources of wealth, funding sources, company connections, transaction patterns, and the intended use of the goods or services are all included in this data.Enhanced and Continuous SurveillanceHigh-risk businesses and their transactions must be exposed to more frequent and comprehensive surveillance to identify abnormal or dubious behaviour, including transaction evaluations.Escalating Fishy Activities Following the detection of suspicious activity, companies must notify the appropriate authorities, such as the Financial Intelligence Unit (FIU) or other regulatory agencies, of the incident.DocumentationOrganizations must keep thorough records of all information acquired, risk assessments completed, and measures taken in response to potentially suspicious activity.How The KYB Can HelpIn-depth and robust Enhanced Due Diligence processes are mandatory to protect your business from financial crimes and fraud. It will help your organization comply with AML regulations and be aware of the companies you are connecting with. With the KYB’s business verification solutions, leverage due diligence processes with AI-driven verification solutions. Additionally, our robust risk assessment procedures assist companies in strengthening their growth and making more informed decisions.
