Enhanced Due Diligence (EDD) is a process that goes beyond standard customer due diligence procedures to provide additional information about customers that are considered to pose a higher risk of financial crime. EDD helps financial institutions to comply with regulatory requirements such as the EU's AML4 directive, which mandates that financial institutions implement enhanced measures for customers posing a higher risk of money laundering or terrorist financing.
Under AML4, financial institutions must implement an effective and risk-based approach to customer due diligence (CDD) that takes into account the customer's risk profile. This means that institutions must identify and verify the customer's identity, assess the risk of money laundering or terrorist financing associated with the customer, and implement appropriate measures to mitigate the identified risks. EDD is an integral part of this process and is required for high-risk customers.
EDD typically involves collecting and verifying more extensive and detailed information about the customer, including their source of funds, business activities, and beneficial ownership (UBO). This information is used to assess the level of risk posed by the customer and to determine the appropriate measures to mitigate those risks. EDD can include additional checks such as site visits, background checks on beneficial owners, and additional documentation.
Incorporating EDD into ongoing customer monitoring is an essential part of an effective anti-money laundering (AML) program for financial institutions. This involves continuously assessing the risk associated with each customer and adjusting the level of due diligence required accordingly. Some ways in which financial institutions can incorporate EDD into ongoing monitoring include:
- Continuously reviewing customer information: Financial institutions should review customer information on a regular basis to ensure that it remains up-to-date and accurate. This includes checking for any changes in the customer's risk profile, such as changes in their business activities or beneficial ownership.
- Implementing automated screening: Financial institutions can use automated screening tools to monitor customer transactions and screen them against relevant watchlists and sanctions lists. This can help to identify any suspicious activity and trigger the need for additional due diligence.
- Moving from periodic reviews to proactive monitoring: financial institutions typically conduct periodic reviews as part of EDD processes. However this can leave them exposed to events that occur between those review periods. Instead, an "always on" approach to in-life monitoring can be used to continuously check against company financial data, adverse media and other relevant information to flag issues as they arise.
Incorporating EDD into ongoing customer monitoring is an important aspect of an effective AML program. By continuously assessing the risk associated with each customer and adjusting the level of due diligence required, financial institutions can better protect themselves from money laundering and other financial crimes.
Overall, EDD helps financial institutions to better understand and manage the risks associated with high-risk customers and comply with regulatory requirements.