Enhanced Due Diligence

Enhanced Due Diligence (EDD) is a more thorough and detailed investigation process conducted by financial institutions and other regulated entities when dealing with high-risk customers, transactions, or jurisdictions. EDD goes beyond standard Customer Due Diligence (CDD) to ensure a deeper understanding of potential risks and to mitigate the likelihood of involvement in money laundering, terrorist financing, or other financial crimes.

Key Points:

1. Purpose: The primary purpose of EDD is to assess and manage higher levels of risk associated with certain customers or transactions. It aims to provide a more comprehensive evaluation to prevent financial crimes and ensure regulatory compliance.
2. When EDD is Required:
   • High-Risk Customers: Clients identified as high-risk due to factors such as their business activities, geographic location, or political exposure (e.g., Politically Exposed Persons or PEPs).
   • Complex Transactions: Transactions that are unusually large, complex, or lack an apparent legitimate purpose.
   • High-Risk Jurisdictions: Transactions involving countries or regions known for higher risks of money laundering, terrorist financing, or regulatory non-compliance.
3. Components of EDD:
   • In-Depth Verification: Collecting and verifying additional information about the customer, such as the source of wealth and source of funds.
   • Beneficial Ownership: Identifying and verifying the ultimate beneficial owners (UBOs) of entities to ensure transparency.
   • Enhanced Monitoring: Implementing ongoing and more frequent monitoring of transactions and account activities to detect unusual or suspicious behavior.
   • Third-Party Information: Utilizing external databases, public records, and intelligence sources to gather comprehensive information on the customer or transaction.
   • Detailed Risk Assessment: Conducting a thorough risk assessment to evaluate the specific risks associated with the customer or transaction.
4. Regulatory Framework: EDD is mandated by various international and national regulatory bodies, including the Financial Action Task Force (FATF), the European Union’s Anti-Money Laundering Directives (AMLD), and local regulatory authorities. Compliance with EDD requirements is crucial for avoiding regulatory penalties and maintaining the integrity of the financial system.
5. Documentation and Record-Keeping: Institutions must document the EDD process, including the information collected, the verification steps taken, and the rationale for risk assessments. Detailed records are essential for demonstrating compliance during audits and inspections.
6. Examples of EDD Measures:
   • Enhanced Identification: Obtaining additional identification documents and verifying their authenticity.
   • Site Visits: Conducting on-site visits to the customer’s business premises.
   • Independent Checks: Using third-party verification services to cross-check information provided by the customer.

EDD is a critical component of robust AML and KYC programs, providing the necessary scrutiny and oversight for high-risk scenarios to ensure that financial institutions can prevent and detect financial crimes effectively.