Explaining Enhanced Due Diligence (EDD) With Examples

Enhanced Due Diligence (EDD) is a crucial process in the field of risk management and compliance. It involves conducting a more comprehensive analysis of customer information to identify and assess any potential risks or threats associated with a particular individual or entity. In this article, we will explore what EDD is, how it differs from standard due diligence, the significance of EDD in risk management, and the challenges and best practices involved in implementing EDD.

What is EDD?

Enhanced Due Diligence, often referred to as EDD, is an advanced risk management process that delves deeper than standard due diligence measures to provide a comprehensive understanding of the risks associated with a customer or business relationship. While traditional due diligence focuses on verifying identity and conducting basic background checks, EDD takes a more in-depth approach by analyzing a wide range of factors.

When conducting Enhanced Due Diligence, financial institutions and businesses may look into the source of funds, beneficial ownership structures, politically exposed persons (PEPs) connections, and complex ownership hierarchies. This thorough investigation helps to uncover any potential vulnerabilities and ensures a more robust risk assessment process.

One key aspect of EDD is the ongoing monitoring of high-risk customers or entities. This involves regularly updating customer information, conducting periodic reviews, and reassessing the level of risk associated with the relationship. By continuously monitoring these relationships, organizations can promptly identify any suspicious activities and take appropriate action to mitigate potential risks.

How Enhanced Due Diligence is Different from Customer Due Diligence

While both EDD and Customer Due Diligence (CDD) share the objective of assessing customer risk, they differ in the level of scrutiny and investigation conducted. Customer Due Diligence generally involves verifying the identity of the customer and assessing the risk associated with them based on their transactional behaviour.

In contrast, EDD requires a deeper level of analysis and investigation, often involving additional verification steps and information gathering. It is typically conducted for customers or business relationships that pose a higher risk based on factors such as their industry, geographical location, or the nature of their transactions.

Enhanced Due Diligence (EDD) is a crucial process in the realm of anti-money laundering (AML) and counter-terrorism financing (CTF) efforts. This advanced level of scrutiny goes beyond the basic identification and risk assessment conducted in Customer Due Diligence (CDD). EDD is essential for identifying and mitigating the risks associated with high-risk customers or transactions that could potentially involve money laundering or terrorist financing.

When conducting Enhanced Due Diligence, financial institutions and businesses may delve into a variety of factors to assess the level of risk posed by a customer. This can include analyzing the source of funds, reviewing the customer's business relationships, and evaluating the purpose of complex transactions. By gathering this additional information, organizations can gain a more comprehensive understanding of the potential risks involved and take appropriate measures to mitigate them.

EDD vs Standard Due Diligence: Key Differences

While standard due diligence measures are essential for customer onboarding, EDD aims to provide a more comprehensive view of the customer's risk profile. Some key differences between EDD and standard due diligence include:

• Scope: EDD involves a wider scope of investigation and analysis than standard due diligence.
• Verification Process: EDD requires additional verification steps and gathering of supporting documentation.
• Monitoring: EDD often involves ongoing monitoring of high-risk customers to detect any suspicious activities.
• Reporting: EDD may result in more detailed reports outlining the findings and risk assessment.

When it comes to standard due diligence, the focus is primarily on verifying the identity of the customer and ensuring compliance with regulations. This process usually involves checking official documents such as identification cards, passports, and proof of address. While this is crucial for establishing the basic information about a customer, it may not provide a complete picture of their risk level.

On the other hand, EDD goes beyond the surface-level checks and delves deeper into the customer's background, transaction history, source of funds, and overall behaviour. By conducting enhanced due diligence, financial institutions can better assess the potential risks associated with a customer and make informed decisions regarding the level of monitoring required.

Checklist for Enhanced Due Diligence 

According to the Financial Action Task Force (FATF), financial institutions should employ a risk-based approach when they try to assess their customers for possible ties to money laundering and terrorist financing (ML/TF) activities. “Customer due diligence (CDD) processes should be designed to help banks understand who their customers are by requiring them to gather information on what they do and why they require banking services,” says the FATF.

The watchdog adds that enhanced monitoring should be required for higher-risk situations, while banks may decide to reduce the frequency and intensity of monitoring where the risks are lower. The amount and type of information obtained, and the extent to which this information is verified, must be increased in high-risk cases. It may also be simplified where the risk associated with the business relationship is lower.

The FATF has suggested banks “to draw up, and periodically update, customer risk profiles, which serve to help banks apply the appropriate level of CDD”.

It has recommended the following as practicable Enhanced Due Diligence procedures:

• Obtaining additional identifying information from a wider variety or more robust sources and using the information to inform the individual customer risk assessment
• Carrying out additional searches (for example, verifiable adverse media searches) to inform the individual customer risk assessment
• Commissioning an intelligence report on the customer or beneficial owner to understand the risk that the customer or beneficial owner may be involved in criminal activity
• Verifying the source of funds or wealth involved in the business relationship to be satisfied that they do not constitute the proceeds from crime
• Seeking additional information from the customer about the purpose and intended nature of the business relationship

High-Risk Customers That Require Enhanced Due Diligence

There are certain types of customers or business relationships that are considered higher risk and therefore require Enhanced Due Diligence. These may include:

• Politically Exposed Persons (PEPs): Individuals who hold prominent public positions or have connections to political figures.
• Foreign Customers: Customers or entities based in countries with a high risk of money laundering or corruption.
• Complex Corporate Structures: Companies with intricate ownership arrangements or offshore accounts that can be associated with illicit activities.
• Cash-Intensive Businesses: Businesses that primarily deal with large amounts of cash, such as casinos or money service providers.

Politically Exposed Persons (PEPs) are individuals who are more susceptible to being involved in bribery, corruption, or money laundering due to their influential positions. They may include government officials, senior executives of state-owned enterprises, or high-ranking military officers. PEPs pose a higher risk because their access to public funds and decision-making authority can make them targets for illicit financial activities.

Foreign customers from jurisdictions known for weak anti-money laundering regulations or high levels of corruption are also considered high-risk. These countries may lack transparency in their financial systems, making it easier for criminals to hide the origins of illicit funds. Financial institutions dealing with customers from these regions must exercise caution and conduct thorough due diligence to mitigate the risk of being unwittingly involved in money laundering schemes.

High-Risk Countries and Industries

Countries designated as high-risk by the FATF, necessitating heightened due diligence procedures, include:

• Albania
• Ghana
• Cambodia
• Zimbabwe
• Panama
• Nicaragua
• Barbados
• Senegal
• Myanmar
• Morocco
• Syria
• Botswana
• Mauritius
• Jamaica
• Burkina Faso
• Uganda
• Cayman Islands
• Iran
• Yemen
• Democratic People’s Republic of Korea (DPRK)

Certain industries inherently face a higher risk of financial crimes and illicit activities, underscoring the necessity for implementing EDD measures.

Examples of industries that necessitate the use of EDD are:

1. Money Services Businesses (MSBs), given the susceptibility to money laundering and terrorist financing activities.
2. Investment firms must conduct customer due diligence to detect suspicious behaviour, verify customer identities, and comply with AML regulations to ensure proper diligence in managing clients' finances.
3. Casino and iGaming platforms, where the implementation of EDD measures helps prevent the laundering of illicit funds through gambling activities.
4. Correspondent Banking, is identified as a high-risk sector where financial institutions establish relationships with foreign banks, making thorough EDD essential to combat money laundering and terrorist financing. Correspondent banking services typically involve funds transfer, settlement, check clearing, and wire transfers.
5. Cryptocurrency exchanges, where the use of EDD is crucial due to the anonymity and global nature of cryptocurrency transactions, help to mitigate associated risks.

EDD Requirements for High-Risk Customers

When conducting Enhanced Due Diligence for high-risk customers, certain requirements need to be fulfilled to ensure a thorough assessment. These requirements may include:

1. Obtaining additional identification documents and verifying their authenticity.
2. Performing in-depth background checks on the individuals associated with the customer or entity.
3. Reviewing the source of funds and conducting transaction monitoring for suspicious activities.
4. Assessing the customer's reputation and industry standing through media searches, regulatory databases, and other reliable sources of information.
5. Engaging in ongoing monitoring and periodic reviews to stay updated on any changes or potential risks.

Enhanced Due Diligence (EDD) is a critical process in the financial industry, especially when dealing with high-risk customers who may pose a greater threat of money laundering, fraud, or other illicit activities. By going beyond standard customer due diligence procedures, EDD helps financial institutions better understand the nature of their customers' transactions and assess the associated risks more effectively.

Furthermore, EDD requirements often involve conducting enhanced scrutiny on politically exposed persons (PEPs) and individuals from high-risk jurisdictions. This involves not only verifying their identities and sources of wealth but also understanding their connections to government officials or entities that may increase the risk of corruption or bribery.

The Importance of EDD in Risk Management

Enhanced Due Diligence plays a critical role in risk management for organizations. By conducting a thorough assessment of high-risk customers, businesses can better understand the potential risks they may be exposed to and develop appropriate risk mitigation strategies.

Moreover, implementing EDD measures demonstrates a commitment to regulatory compliance and integrity, which can enhance an organization's reputation and credibility in the eyes of regulators, clients, and stakeholders.

One key aspect of Enhanced Due Diligence is the use of advanced technological tools and data analytics to gather and analyze information about customers. This can include monitoring transaction patterns, conducting background checks, and utilizing artificial intelligence to identify potential red flags. By leveraging these cutting-edge technologies, organizations can enhance the effectiveness and efficiency of their risk management processes.

Furthermore, EDD goes beyond just identifying risks; it also involves developing tailored risk profiles for high-risk customers. These profiles provide a detailed overview of the customer's background, business activities, financial transactions, and any other relevant information. By creating comprehensive risk profiles, organizations can make more informed decisions about how to manage and mitigate potential risks effectively.

Challenges and Best Practices in EDD

Implementing Enhanced Due Diligence measures can pose certain challenges for organizations. These challenges include:

• Allocating Sufficient Resources: Conducting EDD requires adequate resources, both in terms of manpower and technology.
• Access to Information: Gathering accurate and up-to-date information can be challenging, particularly when dealing with international customers or complex corporate structures.
• Balancing Efficiency and Accuracy: Striking the right balance between conducting a thorough investigation and promptly onboarding customers is crucial.

Despite these challenges, there are several best practices organizations can follow to effectively implement EDD:

• Developing Robust Policies and Procedures: Establishing clear guidelines and frameworks for conducting EDD can streamline the process.
• Investing in Technology: Leveraging advanced technology solutions can automate and streamline certain aspects of the EDD process.
• Continuous Training: Providing ongoing training to employees involved in EDD can ensure they stay updated on regulatory requirements and best practices.

One additional challenge that organizations may face when implementing EDD is the evolving regulatory landscape. Regulations surrounding due diligence practices are constantly changing and becoming more stringent, requiring organizations to stay vigilant and adapt quickly to remain compliant. Keeping up with these regulatory changes can be time-consuming and may require organizations to frequently update their EDD processes and procedures.

Moreover, another best practice that can enhance the effectiveness of EDD is establishing strong relationships with third-party service providers. Collaborating with reputable and reliable external partners, such as data providers or investigative firms, can supplement internal EDD efforts and provide access to specialized expertise and resources. Building these partnerships can strengthen the overall due diligence process and help organizations uncover potential risks more effectively.

Conducting Enhanced Due Diligence

When conducting Enhanced Due Diligence, organizations should follow a systematic approach to ensure a thorough analysis. The following steps can be helpful:

1. Identify the purpose and objective of the EDD process.
2. Define the criteria for identifying high-risk customers.
3. Gather the necessary information and supporting documentation.
4. Conduct an in-depth analysis and assessment of the gathered information.
5. Document the findings and risk assessment in a comprehensive report.
6. Implement appropriate risk mitigation measures based on the identified risks.
7. Perform ongoing monitoring and periodic reviews to detect any changes or emerging risks.

Enhanced Due Diligence (EDD) is a critical process that goes beyond standard due diligence procedures to assess and mitigate risks associated with high-risk customers or transactions. By conducting EDD, organizations can gain a deeper understanding of potential risks and take proactive measures to prevent financial crimes such as money laundering, terrorist financing, and fraud.

One key aspect of EDD is the use of advanced screening tools and technologies to enhance the accuracy and efficiency of the risk assessment process. These tools can help organizations analyze vast amounts of data from multiple sources, including customer profiles, transaction histories, and adverse media reports, to identify red flags and potential risks more effectively.

Enhanced Due Diligence with Tookitaki

Enhanced Due Diligence is a multifaceted process that involves thorough investigation and analysis of potential risks associated with high-risk customers or business relationships. It requires a combination of advanced technology, expert knowledge, and regulatory understanding to effectively identify and mitigate risks.

Tookitaki is a leading provider of advanced AI-powered Fraud Prevention and AML solutions that can help organizations streamline and enhance their EDD processes. Tookitaki's FinCense is an end-to-end anti-financial crime compliance solution that seamlessly integrates with the AFC Ecosystem, employing a federated learning model to train on real-world scenarios for unparalleled fraud detection. With FinCense, benefit from faster customer onboarding, continuous monitoring, and smart screening against PEP, Sanctions, and Adverse Media watchlists.

Simplify your compliance processes with our 360-degree customer risk profiles, reduce false positives with Smart Alert Management, and enhance team collaboration with our centralized Case Manager. Don't let financial crime put your operations at risk. Talk to our experts today and discover how Tookitaki's FinCense can provide fewer, higher-quality alerts and a robust FRAML management process for your business.