Enhanced Due Diligence - Best Practices

Enhanced Due Diligence (EDD) is a fundamental component of Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures. It involves a comprehensive and in-depth examination of high-risk customers, transactions, or business relationships. EDD goes beyond standard due diligence measures to provide a more comprehensive understanding of potential risks. In this guide, we will outline best practices for conducting EDD in compliance with AML legislation and highlight when it should be applied.

When to Conduct Enhanced Due Diligence?

High-Risk Customers: EDD should be conducted when dealing with high-risk customers, such as individuals with financial crime matches (politically exposed persons (PEPs), Sanctions, Adverse Media), individuals from high-risk jurisdictions, or customers with complex ownership structures. Identify these customers during the initial onboarding process.

High-Value Transactions: Whenever high-value or unusually large transactions occur that are not in line with a customer's typical transaction history, EDD should be triggered. This helps detect potential money laundering or suspicious activities.

Unusual Patterns of Behaviour: When customers display unusual patterns of behaviour, such as frequent and rapid movement of funds between accounts or erratic transactional behaviour, EDD should be applied to understand the reasons behind these behaviours.

Changes in Customer Risk Profile: Regularly review customer risk profiles, and if there are significant changes, such as a sudden increase in wealth or a shift in business activities, consider applying EDD to ensure that your customer information remains up to date.

What's Involved in Enhanced Due Diligence (EDD)?

Accessing Additional Identifying Information: EDD entails going beyond standard CDD procedures. It involves accessing additional identifying information from a wider variety of sources, including government databases, public records, and commercial databases. This helps in creating a more comprehensive profile of the customer.

Carrying Out Additional Searches: EDD often necessitates conducting additional searches to verify the customer's identity and background. These searches may include checking for adverse media mentions, politically exposed person (PEP) status, and sanctions lists.

Verifying the Source of Funds: A crucial aspect of EDD is verifying the source of funds involved in the business relationship. This verification is essential to ensure that the funds are not derived from criminal activities or money laundering.

Gaining Additional Information from the Customer: During EDD, financial institutions may engage with the customer to gather more information about the nature and purpose of the business relationship. This helps in assessing whether the customer's activities align with their stated objectives.

Commissioning an Intelligence Report: In some cases, EDD may involve commissioning an intelligence report on the customer or beneficial owner. These reports provide a deeper analysis of the individual or entity's background, reputation, and potential risks.

Best Practices for Enhanced Due Diligence

Customer Identification

• Thorough Documentation: Collect comprehensive customer information, including identity verification documents, business records, and ownership structures.
• PEP Screening: Utilize databases and resources to screen customers against PEP lists and apply additional scrutiny to PEP relationships.

Ongoing Monitoring

• Transaction Monitoring: Implement robust transaction monitoring systems to detect unusual or suspicious transactions. Establish predefined thresholds that trigger further EDD.
• Regular Reviews: Continuously assess customer risk profiles. Review EDD information periodically, especially when customers' circumstances change.

Risk Assessment

• Risk-Based Approach: Employ a risk-based approach to determine the extent of EDD required. Tailor your procedures based on the assessed level of risk.
• Reasonable Justification: Document the rationale behind conducting EDD for specific customers or transactions. This documentation is crucial for audits and regulatory compliance.

Reporting and Record-Keeping

• Suspicious Activity Reports (SARs): Promptly file SARs with relevant authorities if you detect suspicious activity during EDD. Maintain records of all SARs and supporting documentation.
• Data Retention: Retain EDD documentation for the mandated period specified by local AML regulations, typically five to seven years.

Staff Training 

• Training and Awareness: Ensure that your staff are well-trained in EDD procedures and are aware of the importance of AML compliance. Regularly update them on changes in AML legislation.
• Escalation Protocols: Establish clear protocols for escalating potential issues or discrepancies discovered during EDD to the appropriate authorities within your organization.

Enhanced Due Diligence is a critical component of AML compliance and risk mitigation. By understanding when to apply EDD and following best practices, financial institutions and businesses can protect themselves from financial crime, maintain regulatory compliance, and contribute to a more transparent and secure global financial system. Adhering to these best practices is not only a legal requirement but also a responsible and ethical obligation in the fight against money laundering and other financial crimes.