Enhanced Due Diligence (EDD) functions as a vital component of anti-money laundering (AML) approaches because it defends against hazards found in high-risk customers and transactions. According to the Financial Action Task Force (FATF) 2020 report, global financial institutions annually conduct annual money laundering transactions amounting to 5% of global GDP, which justifies the need for proper EDD procedures. The survey results from Statista in 2021 demonstrated an elevation of compliance expenses to 60 percent among financial institutions after upgrading their AML protocols. This shows the increased financial challenge of performing robust EDD processes successfully.
What is Enhanced Due Diligence?
EDD is a threat-based tactic for consumer identity authentication. It is a major component of the Know Your Customer protocol which makes sure that customers are not being part of any type of illegality such as bribery, terror funding, and money laundering.
In most easiest terms, it is the most extended version of the scrutiny protocol into the potential business relationship and their dealing agendas or the complete financial conduction. This process includes the complete checking of the monetary, authorized, and legislative content of the subject, along with other facets such as consumer type and reputation.
The integration of the EDD compliance is usually conducted when the threats are directly linked with the financial conduct or usually when the consumers conduct deep AML risks such as PEPs and other ones from the restricted jurisdictions.
The execution of the complete checking protocols allows enterprises to safeguard consumer relationships and their reserves. It is always assured to implement a risk-based technique while organizing anti-money laundering measures and procedures within a legislative regulation.
5 Key Regulatory Authorities Overseeing EDD in AML Compliance
Financial institutions are required to meet anti-money laundering (AML) regulations through a collaboration between regulatory bodies and law enforcement for more than 20 years in the battle against financial crimes which leads to a secure financial system.
When implementing Enhanced Due Diligence (EDD) policies businesses must define high-risk situations that require specific risk-based assessments; however, they should adapt these procedures for other relevant areas.
- Numerous customers seek to acquire services or products or bank accounts through the company.
- The risk of money laundering and corruption significantly rises when detecting individuals who hold positions of political exposure or maintain relationships as relatives or close associates.
- Heightened risk also arises in cases of anonymous transactions without a clear purpose.
- Any case of false customer information or stolen ID documentation usage during onboarding brings significant concerns for financial institutions.
- Risk level increases when customers form connections with gambling sectors and those involved in mass proliferation or other dangerous industries.
Seven Essential Measures for Implementing EDD in AML
Financial institutions can effectively combat fraud and money laundering by ensuring strong EDD compliance and taking necessary preventive measures. This helps protect the global financial system from exploitation by criminals.
Improved Consumer Identification
Apart from regular KYC checks, businesses at higher risk of money laundering need to gather details about their customers, such as the nature of their business, where their money comes from, and how they usually make transactions. To verify this information, businesses can use local and national databases and advanced data tools to spot suspicious activities.
Authentication of BOs
Companies need to determine the ultimate owner or controller information of clients and business partners according to Financial Crimes Enforcement Network (FinCEN) guidelines. The information serves as a vital tool to stop financial crime, especially when dealing with corporations that disguise their real ownership beneath intricate organizational frameworks.
Demographic Targeting
Countries with weak anti-money laundering laws are placed on FATF’s grey or black lists. If a business is dealing with companies from these risky regions, it needs to apply extra care. This means checking for things like corruption or political instability in those countries before forming any business relationships.
PEPs Detection
People with powerful public positions, like politicians, can misuse their authority and get involved in illegal financial activities. Because of the higher risks, businesses need to apply extra checks (Enhanced Due Diligence or EDD) before working with them. This includes getting approval from senior management and continuously monitoring their activities, not just screening them once.
Customer Risk Scoring
To assess how much risk a customer poses, businesses should create profiles. They can do this by looking at where the customer is located, the type of business they run, how they make transactions, and their public status. Update these profiles regularly to ensure that any risky behavior does not go unnoticed.
Continuous Surveillance
After the initial checks are done, businesses must keep an eye on their clients and partners all the time. Regular reviews and ongoing monitoring help businesses spot any changes in the risk profile and catch signs of suspicious activity early.
Documentation and Reporting
Businesses need to keep detailed records of their checks and any reviews done on suspicious financial activities. Efficient systems can help collect and store these reports.
The Bottom Line
Startups and established enterprises need transparent and successful growth to maintain compliance by partnering with established AML compliance providers.
The right compliance partner makes it possible to handle Enhanced due diligence (EDD) together with anti-money laundering (AML) regulations effectively.
