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Enhanced due diligence and customer due diligence are two different processes to check a customer’s identity and assess their risk profile. Enhanced due diligence is used for high-risk clients and large transactions. High-risk customers and suspicious financial transactions are only dealt with by EDD compliance because they’re difficult to detect through customer due diligence. So, EDD compliance provides high identity assurance by evaluating the customer’s identity and evaluating the customer’s risk category. EDD compliance eliminates the chances of money laundering and terrorist financing and safeguards financial transactions.  

Where Does EDD Compliance Work?

EDD compliance becomes necessary when companies work with the following organizations or people: 

• Politically exposed person (PEP) or someone close to them
• Businesses in countries ranked high on the high-risk third-country list
• Shell corporations 
• Businesses that provide funding for terrorist activities 
• Companies in sectors with a high risk of money laundering
• Ultimate beneficial owners (UBOs)

Difference Between Enhanced Due Diligence (EDD) & Customer Due Diligence (CDD)

Enhanced due diligence (EDD) and customer due diligence (CDD) are the two advanced forms of KYC processes. Customer due diligence is the process of verifying the identity of customers by matching the given data to the database. This process applies when opening an account or making a transaction. If the risk associated with the customer is low, they may be subject to simplified customer due diligence. It identifies the customer but does not verify it. 

Edd compliance is an advanced KYC process for high-risk consumers. A consumer is considered high risk according to location, occupation, or political exposure. So, it is typically applied when entering into a business relationship with a politically exposed person, when the transaction involves a person from a sanctioned country, or in cases of high risk of money laundering.

Enhanced Due Diligence In Banking and

Enhanced due diligence is an advanced form of KYC for high-risk customers. It entails gathering information from consumers, verifying their identities, and assessing the amount of money laundering risk associated with them. EDD compliance requires more consumer data and utilizes this data to minimize risks.

FATF suggests the following best practices for enhanced due diligence 

• Obtaining more data from a diverse and extensive range of reliable sources 
• Conducting additional searches for verification 
• Verify the source of funds in a commercial partnership 
• Seek detailed information from a consumer regarding the purpose and nature of business
• The FATF suggests that the banks should introduce a risk-based strategy to detect suspicious behavior or assess risk 

How To Execute Enhanced Due Diligence?

EDD compliance is a complex process that breaks down into some simple steps listed below: 

Using a Risk-Based Approach 

The risk-based approach is essential to helping identify customers and risk factors associated with the profiles. Evaluating the customer’s risk level is an important part of AML compliance, as they may commit money laundering or other financial crimes. Moreover, businesses that don’t fulfil AML compliance may face penalties from regulatory authorities.

Analyzing The Origin And Ownership Of Funds

The businesses should assess the source and legitimacy of the funds involved in the transactions. Inconsistencies and gaps between the net worth, earnings, and wealth source should be thoroughly investigated and detected. 

Tracking Ongoing Transactions 

If a customer has a transaction history, it should be checked. Transaction details, such as nature and purpose, should be investigated based on their processing time and interested parties.

Adverse Media And Negative Control 

Companies should analyze relevant press articles to create a complete profile of the reputation of their customers. Negative results mean the organization is too risky to do business with.

Write A Report Paper 

Firstly, companies should know how to implement a risk-based approach. Then, companies can create risk factors based on their industry. Secondly, companies should report their activities using AML compliance software.

Developing An Ongoing Risk-Based Monitoring Strategy

It’s difficult for businesses to maintain continuous monitoring of their customers. So, companies should develop a risk-based monitoring strategy that can alarm businesses when a high-risk customer or suspicious activity happens.

To Wrap Things Up 

EDD compliance is a combination of expertise and technology. As the crime rate increases, there must be an innovative approach to EDD, like there is to AML/CFT compliance. Technology provides valuable insights into the EDD process, but human vigilance is best for spotting threats. So, enhanced due diligence is used for businesses with high risks of financial crimes.