What is Enhanced Due Diligence? When does it Apply to Your Business?

With the increase in financial crimes, financial organizations and other regulated entities must take measures to determine and evaluate each client’s risk of money laundering and terrorist financing. Organizations should carry out a series of tests as part of the customer onboarding process to enable them to recognize possible financial crime threats. 

Three levels of due diligence can be carried out based on the risk involved: Simplified Due Diligence, Standard Due Diligence, and Enhanced Due Diligence.

In this blog, we will learn about enhanced due diligence in detail.

Understanding the Enhanced Due Diligence Process

Enhanced Due Diligence (EDD) is a process in which comprehensive data regarding a potential client’s background and risk involved in the transaction is to be collected. EDD is required in the case of high-risk clients, as companies can obtain more detailed information.

The motive behind EDD is to reduce the risk that new business agreements may bring, particularly for high-risk businesses or high-net-worth individuals and large transactions.

EDD is the highest level of due diligence that an organization needs to perform as part of its Know Your Customer (KYC) requirements.

How does the Enhanced Due Diligence Process Work?

According to the guidelines issued by FATF, businesses need to integrate risk-based EDD measures in their system so that AML/CFT risk associated with their clients can be highlighted.  These should include:

• Acquiring additional resources for client background verification  
• Examining the source of funds or wealth
• Closely monitoring the aspects of a transaction
• Implementing ongoing monitoring protocols

Enhanced due diligence is often a part of normal operations and a requirement for most people and companies.

An alert can be set up to trigger the implementation of EDD in the monitoring protocol to demand further verification. Businesses should conduct internal and external investigations to find out more about the client and the transaction. They can also ask for additional proof from the client to back up their information.

Who Needs Enhanced Due Diligence and When?

Financial institutions and other entities governed by AML laws are required to perform EDD. The following situations may result in financial institutions conducting EDD:

• When entering into a new agreement with a new client (depending on the nature of the product or service for which they are applying)
• When certain factors indicate that the risk associated with an existing client has increased
• When the client falls under the definition of a Politically Exposed Person (PEP) or any close acquaintance of PEP
• When the clients have ties to businesses that have higher risks, such as gambling and the weapons/firearms trade
• When there is a significant possibility of money laundering, like in the case of an odd transaction involving a client whose behavior may seem suspicious or without proper reasons
• When a client provides fake or extorted documents during KYC performed at the time of client onboarding

It is advisable to conduct EDD during the above situations; however, this does not imply all high-risk clients are inherently criminals; rather, they indicate higher-risk factors that warrant closer attention. Failure to apply EDD measures in a clearly suspicious situation can cause very serious trouble.

Enhanced Due Diligence vs. Customer Due Diligence

The customer due diligence process is generally required in the case of low-risk customers, unlike enhanced due diligence, which is required in the case of customers or businesses carrying higher risk.

Let’s see the difference between the two processes below:

In the case of CDD, basic information is required from the client’s end, but in the case of EDD, extensive proof and comprehensive information are required as EDD rules are stringent.

Further, detailed and quick documentation of the EDD process is required by the regulators.

The EDD process necessitates an in-depth inspection of the source of information collected and a deeper review of the information collected than CDD.

EDD requires reasonable assurance for assessing KYC risk. Therefore, the decision-makers must perform all relevant research steps and use their professional expertise to conclude. In the case of EDD, PEPs must be given special attention since they are perceived to be involved in money laundering.

It is quite difficult to determine how much information about a client would be sufficient to conduct EDD. To overcome this, you must implement automated AML screening software in your KYC processes.

Why should Businesses Conduct Enhanced Due Diligence

Failure to execute enhanced due diligence results in legal, financial, and reputational implications. In 2023, penalties amounting to $8.34 billion were imposed for non-compliance with KYC, AML, CDD, sanctions, and ESG regulations globally. 

Furthermore, non-compliance depicts flaws in a company’s AML systems and controls, highlighting potential risk factors for money laundering/terrorist funding and avoiding penalties.

Plus, businesses can benefit from implementing EDD in other different aspects rather than just meeting legal requirements. EDD helps companies understand the client’s preferences and needs in a better way to serve customers better.

How Signzy Helps with Enhanced Due Diligence

While the high-risk requirement for Enhanced Due Diligence makes it an infrequent event, it is prudent to be prepared for even the most unlikely situations. Signzy’s API marketplace helps businesses meet EDD requirements without businesses needing to incur additional technical costs.