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What is Enhanced Due Diligence (EDD) for High Risk Customers?

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To enhance due diligence (EDD) for high-risk customers, financial institutions must go beyond standard checks to gain a comprehensive understanding of the client. This includes verifying additional identifying information from various sources, establishing and scrutinizing the source of funds and wealth, and identifying the ultimate beneficial owners of assets. Implementing ongoing, real-time transaction monitoring and regularly checking for negative media or other public red flags are also crucial for maintaining an accurate risk profile.

What is Enhanced Due Diligence (EDD)?

Enhanced Due Diligence (EDD) is a critical component of Know Your Customer (KYC) and Anti-Money Laundering (AML) frameworks, designed to thoroughly screen customers who present a higher risk. Unlike standard Customer Due Diligence (CDD), EDD goes into greater detail to assess the potential hazards posed by high-risk customers and transactions.

Why is EDD Important?

Implementing robust EDD processes is vital for financial institutions to accurately categorize customer risk and verify their true identity. Failure to comply with these regulations can result in severe penalties and reputational damage. By automating EDD, banks can stay ahead of the regulatory curve and ensure compliance

Key Aspects of EDD in Banking

EDD allows banks and financial institutions to closely examine high-risk customers and identify anomalies that standard checks might miss. By applying EDD and AML techniques, firms can analyze suspicious transaction patterns, monitor business information, and assess risks associated with politically exposed persons (PEPs). This meticulous evaluation typically includes:

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

Enhanced Due Diligence (EDD) Process & Procedure

  1. Use a Risk-Based Approach

    To begin, financial institutions should use a risk-based approach to effectively identify and investigate high-risk customers. Employing specialized software that can generate alerts based on customer profiles or suspicious activities is a key part of this strategy, allowing for targeted investigations.

  2. Find Additional Credential

    Creating an advanced due diligence checklist is crucial for financial bodies to gather all necessary details about their customers. This ensures a comprehensive collection of information beyond the basic requirements.

  3.  Analyze the Origin and Ultimate Beneficial Ownership (UBO) of Funds

    To understand the true ownership of a company, it's essential to scrutinize its subsidiaries and shareholders. This process helps uncover the Ultimate Beneficial Owner (UBO) and prevents the use of complex structures to conceal identity.

  4. Track Ongoing Transactions

    Institutions must continuously scrutinize transaction details, paying close attention to their purpose and nature. This ongoing monitoring helps detect unusual patterns that may indicate illicit activities.

  5. Verifying the Source of Funds

    A critical step is understanding the origin and legitimacy of a customer's wealth. Any significant discrepancies between their declared earnings and net worth should be thoroughly investigated.

  6. Adverse Media and Negative Control

    Financial institutions must actively monitor public sources, such as press articles and online media, to identify any negative information or reputational risks associated with a customer.

  7. Visit On-Site

    For documents or physical addresses that cannot be digitally verified, on-site visits may be necessary. This provides an additional layer of verification and helps confirm the legitimacy of a business or individual.

  8. Obtaining Additional Information

    Gathering information from a variety of robust and varied sources is vital. The more data points you can collect, the better equipped you are to understand and assess the risk profile of a customer.

  9. Write Report Papers to Investigate

    To maintain a proactive stance, banks and financial institutions should regularly scan customers and generate detailed reports.

  10. Develop an Ongoing EDD Monitoring Strategy

     Creating a continuous transaction monitoring strategy is essential for long-term success in mitigating risk. This approach, while requiring time to develop, ensures that customer risk profiles are always up-to-date and accurate.

Which of the Following Attributes Are Used to Identify a High Risk Customer for EDD Monitoring?

To identify high-risk customers for Enhanced Due Diligence (EDD) monitoring, financial institutions assess a range of key attributes. These attributes provide a comprehensive view of the customer's risk profile and help to uncover potential illicit activities.

  • Location of the Business: The geographical location of a business is a critical factor, especially if it has ties to high-risk countries known for money laundering or sanction violations.
  • Occupation or Nature of Business: Analyzing the customer's industry or profession helps assess potential risks associated with their specific business activities.
  • Purpose and Pattern of Transactions: Understanding the objectives, volume, and frequency of transactions provides a baseline for monitoring, making it easier to spot unusual patterns.
  • Payment Origination and Methodology: Tracing where payments originate from and how they are conducted can reveal suspicious activities that warrant closer investigation.
  • Legal Documentation: Reviewing legal documents like articles of incorporation and business certificates is essential to verify the legitimacy of a business operation.
  • Understanding the Customer's Customers: Gaining insight into a customer's own clientele helps uncover indirect risks that might otherwise go undetected.
  • Beneficial Ownership Identification: Identifying who truly benefits from an account is crucial for uncovering hidden risks and preventing the use of shell companies.
  • Salary or Annual Sales Insights: Analyzing a customer's financial strength, such as their salary or annual sales, helps refine the risk assessment.
  • AML Policies and Local Market Reputation: A review of a customer's existing Anti-Money Laundering (AML) policies and their reputation in the local market, often through media sources, helps solidify their risk profile.

Automating EDD with Fenergo's Software

Traditional methods struggle to keep pace with the rapid changes in EDD requirements. It's not just about what 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 & Accounts in Banking

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.