Understanding the Distinction of CDD vs. EDD in AML Compliance

As cybercrime continues to aggressively expand and pose new challenges to regulators and law enforcement agencies across the globe, anti-money laundering (AML) efforts have become vital to protecting the public interest. Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are now a crucial component of AML compliance. Below, we’ll take a closer look at the differences between CDD and EDD ad why they play such a vital role in stopping fraudulent behaviours and a wide variety of other financial crimes. Read on to learn more.

Customer Due Diligence (CDD): Laying the First Layer

Customer Due Diligence is the first step in any effective AML program, and serves a bridge between necessary safety verification ad unknown users. Customer due diligence involves gathering key information such as the customer’s name, DOB, address and financial history. This information allows businesses to create customer profiles and categorize them into different risk levels, such as low, medium, or high risk. Low-risk customers may include individuals with stable financial backgrounds, while high-risk customers may exhibit characteristics that warrant further scrutiny. CDD establishes a baseline for customer relationships and allows organizations to take a risk based approach to ongoing monitoring and AML compliance.

Enhanced Due Diligence (EDD): A Deeper Dive

Where CDD sets the “foundation” for verification, Enhanced Due Diligence takes AML compliance to the next level. EDD is applied when a customer is deemed to be of higher risk due to specific factors, such as their business activities, location, or personal history. EDD takes a much closer look at the customer’s background, financial transactions, and the potential risks associated with the relationship in a bid to form a much more robust risk profile.

Where persons with elevated AML risks are involved; dealing with PEPs, high-risk industries or transaction originating from jurisdictions with

The importance of EDD becomes evident when dealing with customers or entities that present elevated AML risks. These may include politically exposed persons (PEPs), businesses in high-risk industries, or customers from jurisdictions known for money laundering or terrorist financing.

EDD will vary depending on the level of risk associated with the customer, with some risk factors warranting an extensive background check, verifying the source of funds, scrutinizing complex ownership structures, or even seeking third-party intelligence reports on activities. EDD helps organizations identify potential threats that might have gone unnoticed with standard CDD procedures.

How They Work Together

CDD and EDD work in tandem to protect financial institutions and society from financial crimes, with CDD providing the foundation upon which EDD builds.. Not all customers pose the same level of risk, and EDD will to always be necessary, but implementing a risk-based approach helps organizations to allocate their resources more efficiently.

It is also importance for compliance with several regulatory standards that businesses be able to demonstrate that they have a valid system for conducting CDD and EDD. Failure to comply ca result in severe penalties, including fines and legal consequences, making it essential to understand and apply both levels appropriately when needed.

Trust Made Easy

At iComply, we know that compliance with KYC and AML legislations is essential in the battle against cybercrime. We are proud to partner with businesses and organizations to offer a modular suite of KYC, KYB, and AML products that not only ensures you have everything you need utilize a wide range of jurisdictional AML regulations and conduct risk-based assessments but also automates your customer identification and risk screening processes more intuitively than ever before.

Book a demo with our team today to learn more about iComply’s AML solutions and discover how iComplyKYC can be customized to fit the unique risk screening needs of your organization.

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