What Is Enhanced Due Diligence?

Enhanced due diligence (EDD) is a customer screening process that increases the security of business relationships. EDD is part of the broader practices covered by Know Your Customer (KYC) regulations. KYC requires organizations in specific industries (i.e., the financial sector) to perform customer verification, verify the identity of potential customers, and ensure that they do not pose a high risk. 

EDD provides greater insight into potential risks than standard customer due diligence (CDD) processes. Its objective is to provide a higher level of assurance regarding a customer’s identity and risk category. The process involves:

  • Verifying the identity and address of the customer.
  • Conducting a background investigation.
  • Evaluating the level of risk posed to the organization. 

Enhanced due diligence is a special requirement for processing individuals with a high net worth or who represent a high potential risk. It is also required when dealing with large transactions. This is because the risk impact for such individuals and transactions is more significant, requiring tighter regulatory control and monitoring to prevent businesses from supporting illicit activities. 

Related content: Read our guide to Customer Due Diligence (CDD)

In this article:

When Is Enhanced Due Diligence Needed?

Enhanced due diligence is necessary for high-risk customers or transactions, which carry a high risk of money laundering and terrorist financing and thus represent a more considerable risk to banks. The level of risk associated with customers can relate to their jurisdiction, the financial products sold to them, the characteristics of the individual or company, or the properties of a specific transaction. 

Financial institutions must identify high-risk customers and demonstrate they have a close familiarity with those customers.

The following factors can cause a customer to be defined as high risk and thus require enhanced due diligence:

  • Customer factors—financial institutions in the US must comply with the Bank Secrecy Act. Risk factors according to the BSA customers who are non-residents of the country in which the financial institution operates, and clients or their relatives who are politically exposed persons (PEP). PEP is an individual who holds a prominent public position or function. 
  • Geographic factors—regional and diplomatic relations between countries, play an essential role in EDD. People from politically sanctioned countries will often classify as high-risk customers. In addition, customers from territories where known terrorist organizations operate might also classify as high risk.
  • Other risk factors—the private banking sector has a high level of confidentiality and is thus more vulnerable to money laundering and terrorist financing. Higher risk should be associated with private banking customers and transactions, combined with other risk factors.

 

Related content: Read our guide to Customer Due Diligence (CDD) in banking

Enhanced Due Diligence Benefits

Enhanced due diligence provides several critical benefits for banks and financial institutions:

 

  • Enhances the customer experience—identity verification requires a large amount of information. This information will not only help you identify customers with high-risk transaction histories. It can help a financial institution serve them better based on their needs and preferences for legitimate customers.
  • Keeps company documents clean—conducting enhanced due diligence can help prevent dirty or illegally earned money from entering the business ecosystem. Maintaining clean financial documentation containing only “white” transactions is a tremendous benefit for financial management, which EDD verification helps to achieve. It allows financial managers to see customers and all entities related to their business, including individuals and shareholders. EDD provides a layer of security that protects a business from money laundering and other criminal activities.
  • Improves reputation—enhanced due diligence and corporate social responsibility (CSR) can help a financial institution build its brand image. Other companies will trust a bank more when they closely monitor every transaction, and the organization does not serve high-risk customers.
  • Prevents fraud—EDD prevents money laundering and other fraudulent tactics such as terrorist financing and account theft. Improving due diligence can help deter financial crime and allows the organization to focus on business growth.

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How to Conduct Enhanced Due Diligence

Employ a Risk-Based Approach

The risk-based approach provides an organization with insight into the high-risk customers in their business and other cases that warrant high-risk categorization. This approach demands the accurate judgment of the customer’s risk level. Another essential measure is creating a duration for the due diligence method, and all these items should be apparent in your AML compliance policy. 

Obtain Additional Identifying Information 

Distribute a questionnaire in keeping with your risk-based approach to high-risk customers. This questionnaire must offer both essential and detailed information about your customers. Gather additional data from the customers and third parties. 

Here are places to obtain additional identifying information from businesses and other legal entities: 

  • Official company records from business management
  • Registration items from the local registrar of companies
  • Articles of partnership agreements, business certifications, and incorporation
  • Locations and names of its suppliers and customers
  • Banking details and connections with other financial institutions
  • Identity of beneficiaries and board members

Here are places to obtain additional identifying information for politically exposed persons (PEP):

  • Title and information about the position the PEP held or holds, including the degree of influence of the role
  • If the PEP is a family member or close associate, you should establish the title, identity, position, and degree of proximity to public office. 

Analyze the Source of Funds / Wealth and Ultimate Beneficial Ownership (UBO)

You need to gain information that will show the origination of your customer’s wealth. You must contrast the value of your client’s financial and non-financial assets with their tangible assets to ensure that the sums match. Any irregularities between their wealth source, net worth, or earning are reasons for suspicion, and you should investigate more.

It would be best to determine the beneficial ownership of your client’s organization and double-verify the owner’s identity. 

Transaction Monitoring

Examine the transaction history of your client, including the processing of the transaction times. This process should also include the nature and purpose of their transactions. Be aware of any inconsistencies between the anticipated value of services and goods and the figure paid or received—any mismatch is a reason to be suspicious. 

Conduct an On-site Visit

You should conduct an on-site visit to the physical addresses of all legal entities, including companies and banks. You can physically verify documents that you cannot complete digitally. A risk-based limit is breached if the address provided on the official records does not correspond with the physical address. 

Draft Your Report for Further Review 

After completing all the above steps, you need to determine whether or not the client is too high-risk for you to continue your relationship with them. If you decide that the client is not too high-risk, you must draft a report outlining your EDD plans for overseeing your client in the future.

This report must have a timetable showing when you will conduct monitoring activities. You should then store your information in a secure location, together with the data you have collected so far. 

Customer Due Diligence and KYC Identity Verification with BlueCheck

BlueCheck helps financial institutions conduct KYC checks, including identity and age verification, to meet anti-money laundering regulations. Key features include:

  • Multiple datasets to confirm information—a combination of proprietary and commercially available databases are queried to verify the information. BlueCheck can increase the likelihood of a successful verification using this combination of resources, streamlining the onboarding process.
  • Smart Database Navigation—BlueCheck can automatically verify most customers using smart database navigation. Queries move through the most accurate databases commercially available to ensure a match.
  • Quick Implementation—Using our DirectAPI or CustomJS framework, BlueCheck Identity Verification can deploy quickly, saving your business time and money.
  • Set How Users Are Verified—BlueCheck offers a host of verification methods giving users a choice and alternatives when identifying themselves. For example, allow for name & address, last 4 of SSN, or Photo ID verification.
  • Encryption & Security Standards—BlueCheck utilizes multi-layer data encryption to ensure data is securely transmitted and stored, protect against malicious actors, and safeguard the verification process.
  • Developer & API Documentation—thoroughly documented REST API available in addition to the verification plugin.

 

Schedule a call today with a BlueCheck specialist to learn more about our Age & ID Verification solutions. 

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