Enhanced Due Diligence – Authenticating High-Risk Clients to Eliminating Money Laundering

Enhanced Due Diligence – Authenticating High-Risk Clients to Eliminating Money Laundering

In this era of digital revolution, companies face many serious challenges to attract customers. There is always the risk of inadvertently adding bad actors, which can compromise the integrity of the system. Businesses need a robust system that can reliably and efficiently authenticate customers. Enhanced due diligence (EDD) procedures can help financial institutions protect their sensitive data. It can successfully verify the identity of stakeholders, merchants, consumers, and even high-risk customers. EDD is an enhanced version of CDD that helps companies to mitigate fraud. The EDD program can also help companies comply with KYC/AML regulations to ensure optimal KYC security checks.

Enhanced Due Diligence in Banking

Banks use EDD in order to comply with KYC requirements. This includes collecting information to verify the identity of our customers and calculating the actual level of money laundering risk associated with each customer. The enhanced due diligence process requires the customer to provide more information than the CDD process. Businesses using this data can help to lower their risk.

In general, the Financial Action Task Force (FATF) recommends a risk-based approach when implementing ESD in the banking sector: “Risk is higher in the business relationship”. 

FATF suggested practical steps for Enhanced Due Diligence (EDD) in banking;

  1. Obtaining more identification information from more dependable and impartial sources
  2. Conducting further investigations (such as verifiable negative media investigations)
  3. Making sure the source of the money or wealth involved in the business relationship is known
  4. Requesting more details from the client regarding the goals and intended dynamics of the business relationship

Difference Between Enhanced Due Diligence and Customer Due Diligence?

There are several differences between customer reliability testing and improving reliability testing. First, CDD and EDD have different levels of the KYC process. Enhanced due diligence in banking goes above and beyond CDD, which involves identifying customers by comparing the information provided by the database and confirming their identity.

In addition to the standard due diligence procedure, Enhanced Due Diligence (EDD) is applied to customers who are considered high-risk (such as politically exposed and sanctioned individuals). Most importantly, customers provide more information.

EDD in banks is much stricter than CDD in banks and their implementation takes more time for both the customer and the bank. The exact EDD procedure varies depending on the country that the bank is located in, but according to FATF recommendations, banks should check the client’s source of funds. Regular inspections can identify shady transactions, look for negative press, and keep thorough records of the decision-making procedure.

3 Main Factors Must be Consider While Assessing AML Risk

In order to determine the likelihood of money laundering associated with corruption, three factors must be taken into account, per FATF guidelines. These are:

  1. Factors that increase the risk of a customer, like who are politically exposed
  2. Geographical risk elements, such as whether the client is doing business in a nation or territory with a weak AML system or one that is on a sanction list
  3. Product, service, transaction, or delivery channel risk factors, such as whether the customer receives anonymous transactions or receives payments from unknown third parties

Who are High-Risk Clients?

All clients who pose a risk should go through stricter due diligence checks. Banks have greater exposure and risk associated with these customers since they pose a high risk of money laundering and terrorist financing.

Depending on the circumstances, organizations may use different formulas to determine each customer’s level of risk. Risk profiles for customers are commonly created when considering factors like the customer’s location, the service he or she is seeking, and the nature of the customer. Document verification is also used for this purpose.

If any of the following risk factors apply, businesses must take that into account when deciding whether there is a need for EDD processes:

Customer-related risk factors

  1. The customer is on a list of persons who are politically exposed
  2. Close relatives and friends of the client are politically exposed individuals.
  3. A number of the client’s transactions are with foreigners or non-residents.
  4. The customer owns a cash-based company.

Territory-related risk factors

  1. The client comes from a country that does not have enough anti-money laundering (AML) and/or anti-terrorism financing (CFT) measures in place
  2. The customer comes from a nation that is under sanctions or is the target of a prohibition
  3. There is a high level of corruption in the country where the client comes from
  4. The client is from a nation that is on the sanctions list for funding or supporting terrorism
  5. There is a terrorist organization known to have ties to the jurisdiction of the consumer
  6. The user comes from a nation that is not a member of the FATF

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