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How To Enhance Due Diligence Procedures For High-Risk Customers

Global financial transactions always hold risks and dangers, ranging from money laundering to terrorist financing. For companies that want to protect against these risks, understanding their customers is not only vital but mandatory. Here is where the concept of Enhanced Due Diligence (EDD) comes into play.

What is Enhanced Due Diligence (EDD)?

EDD, embedded within KYC and AML frameworks, functions as a sophisticated filter to screen customers who pose a higher risk. Unlike the preliminary phase of Customer Due Diligence (CDD), EDD delves deeper into assessing the potential hazards associated with high-risk customers and transactions.

Enhance Due Diligence processes are essential in evaluating the risk category of the customer or business and assuring their real identity. Failing to comply with these regulations can lead to severe penalties and reputational damage. By automating EDD processes, financial institutions and banks can position themselves ahead of the curve. 

Utilizing EDD, banks and financial entities can scrutinize high-risk customers and detect anomalies that might slip past conventional checks. By implementing EDD AML techniques, financial firms can dissect suspicious transaction patterns, monitor business information, or assess risks related to politically exposed persons.

Enhanced due diligence in banking involves a meticulous evaluation that encompasses various attributes such as:

  • The source of funds 
  • The nature of business relationships
  • The purpose of transactions 

Enhanced Due Diligence KYC Factors

  • Location of the Business: Understanding the geographical setup, including any ties to high-risk countries, contributes to assessing the potential risk money laundering or sanction violations pose.
  • Occupation or Nature of Business: Analyzing the industry or profession provides insight into the possible challenges and risks associated with a specific business relationship.
  • Purpose and Pattern of Transactions: Clarity about the objectives and anticipated patterns, in terms of transaction types, volume, and frequency, helps in transaction monitoring processes.
  • Payment Origination and Methodology: Tracking where payments are coming from and how they are made can reveal suspicious patterns that require attention.
  • Legal Documentation: Articles of incorporation, partnership agreements, and business certificates offer essential insights into the legality and legitimacy of the operation.
  • Understanding the Customer's Customers: This higher-level insight uncovers potential indirect risks that may otherwise go unnoticed.
  • Beneficial Ownership Identification: Discovering who truly benefits from the account or customer is essential to uncover hidden risks. To discover who a Beneficial Owner is, read our guide. 
  • Salary or Annual Sales Insights: Understanding financial strengths and weaknesses further refines risk assessments.
  • AML Policies and Local Market Reputation: A review of existing Anti-Money Laundering (AML) policies, along with market reputation through media sources, solidifies the risk profile.

Checklist of the Enhanced Due Diligence (EDD) Process 

So, what is enhanced due diligence in banking? It’s not just a set of tasks to be followed blindly. It's a nuanced approach, flexible and adaptable, tailored to fit specific situations. Let's take a look at a comprehensive enhanced due diligence checklist.

  1.  Use a Risk-Based Approach: Banks and financial institutions need to detect and investigate high-risk customers. They should use software that can alarm them based on customer profiles or suspicious activities.
  2.  Find Additional Credentials: Financial bodies must create an advanced due diligence checklist that provides all necessary details about their customers.
  3.  Analyze the Origin and Ultimate Beneficial Ownership (UBO) of Funds: Subsidiaries and shareholders must be checked to understand the ownership of a company.
  4.  Track Ongoing Transactions: Institutions must scrutinize transaction details, including purpose and nature.
  5.  Verifying the Source of Funds: Understanding the origin and legitimacy of the customer's wealth is crucial. Discrepancies in earnings and net worth should be probed.
  6.  Adverse Media and Negative Control: Financial institutions must keep an eye on press articles and reputation.
  7.  Visit On-Site: Physical addresses and documents that cannot be digitally obtained need to be verified.
  8.  Obtaining Additional Information: Information is power. The more varied and robust the sources, the better they understand the risk.
  9.  Write Report Papers to Investigate: Banks and financial institutions must regularly scan customers and create reports using Enhanced Due Diligence AML compliance software.
  10.  Develop an Ongoing Risk-Based Monitoring Strategy: Developing a continuous monitoring strategy takes time, but it's essential for long-term success.

Beneficial Ownership EDD Requirements

Beneficial ownership refers to the individual or entity that enjoys the possession and control of assets, even if the title belongs to another entity. In the context of enhanced due diligence (EDD), understanding the ultimate beneficial ownership (UBO) structure is increasingly becoming a mandatory requirement for financial institutions.

International regulations require financial institutions to identify beneficial owners, complying with global standards like OFAC and FCPA. Different regions, such as Europe and the U.S., have specific mandates for maintaining beneficial ownership information.

Automating EDD with Fenergo's

The challenges posed by EDD are multifaceted, involving the constant monitoring of high-risk customers, adherence to diverse regional regulations, and the intricate task of money laundering prevention. Traditional methods struggle to keep pace with the rapid changes in EDD requirements. It's not just about what is EDD banking is today; it's about predicting and preparing for what it could be tomorrow.

Fenergo aims to modernize the EDD landscape, bringing cost efficiency and innovation to the fore. With a focus on enhanced due diligence attributes, the platform offers a way to integrate customer due diligence, transaction monitoring processes, and risk assessments into a seamless workflow.

Get to know Fenergo’s KYC Solution

Types of High-Risk Customers

High-risk customers play a pivotal role in the EDD process. Enhanced due diligence is usually required for:

  • Politically Exposed Persons (PEPs): PEPs, including government officials and their close family members, are subject to enhanced scrutiny due to their potential influence and vulnerability to bribery or corruption.
  • Clients with Criminal Ties: Individuals or entities linked to financial crimes or terrorist activities naturally fall into this category.
  • Cash-Intensive Businesses: Businesses that predominantly deal in cash transactions often raise eyebrows for their higher risk of money laundering.
  • Anonymous or Non-Face-to-Face Interactions: Online platforms or businesses that facilitate transactions without direct customer interaction present unique challenges in tracking the source of funds.
  • Businesses in High-Risk Countries: Operating in countries with active sanctions, high corruption rates, or links to terrorism heightens the scrutiny levels.
  • Private Banking Institutions: Private banks often cater to wealthy individuals, requiring a more comprehensive review under EDD procedures.
  • Unexplained Business Relationships: Relationships that lack clarity or rationale, such as offshore firms serving distant locations, may signal underlying risks.
  • Complex business structures: Businesses that have an unusually complex or opaque ownership structure often indicate potential risks, requiring enhanced due diligence.

More on Enhanced Due Diligence

How to identify a high-risk customer for enhanced due diligence?

High-risk customers are typically identified through factors like their jurisdiction, nature of transactions, and types of products accessed. Special attention is paid to politically exposed persons and those engaged in complex, large-volume financial activities.

What type of customer due diligence to be applied for high-risk customers?

For high-risk customers, institutions often apply enhanced due diligence, which includes comprehensive checks, ongoing monitoring, and regular risk assessments to ensure full compliance with relevant regulations.

What are the 4 elements of customer due diligence?

The four key elements of customer due diligence include customer identification, risk assessment, understanding the nature of the customer's business, and ongoing monitoring of the customer's activities.

What are the 3 types of customer due diligence?

The three types of customer due diligence are simplified due diligence (SDD), standard due diligence (CDD), and enhanced due diligence (EDD), each differing in the level of scrutiny based on the perceived risk.