Deepening Background Verification: A Banking Imperative
Enhanced Due Diligence (EDD): A Key Tool in Financial Crime Prevention
Financial institutions are increasingly employing Enhanced Due Diligence (EDD) to combat money laundering and terrorist financing. This specialized process is an extension of the Customer Due Diligence (CDD) and Know Your Customer (KYC) practices, designed to scrutinise high-risk customers and transactions more thoroughly.
The EDD Process
EDD involves a series of actions that go beyond standard due diligence. These include obtaining additional information about the customer's background, gathering detailed insights into the purpose and nature of the business relationship, increasing the frequency and depth of ongoing transaction monitoring, performing adverse media and sanctions screening, obtaining senior management approval before establishing or continuing a customer relationship, conducting interviews or in-person meetings with the customer, applying enhanced verification procedures for identity and beneficial owners, and more [1][2][3][4].
The Importance of EDD
EDD plays a crucial role in helping financial institutions manage and mitigate the risks associated with certain customers or transactions. These may include politically exposed persons (PEPs), customers from high-risk or sanctioned jurisdictions, complex ownership structures, transactions involving large amounts or unusual patterns, cash-intensive businesses, high-value asset purchases, and more [1][3][4][5].
By applying EDD, institutions can better comply with Anti-Money Laundering (AML) regulations, detect and prevent financial crimes, and avoid penalties from regulatory bodies [2][4].
The Connection between KYC, CDD, and EDD
KYC is the overarching process of verifying the identity of customers and understanding their financial dealings to assess risk. CDD is a foundational KYC practice that includes collecting basic customer information, verifying identities, and assessing risk levels for routine customers. EDD is an extension of CDD applied to customers identified as high risk, requiring more comprehensive scrutiny and continuous monitoring [1][2][3].
Together, KYC, CDD, and EDD form a tiered approach to risk management. KYC sets the framework; CDD applies standard procedures based on risk; EDD intensifies investigative measures where elevated risk is detected [1][4].
In summary, EDD is an intensified KYC/CDD process for high-risk customers and transactions, essential for preventing financial crimes by enabling financial institutions to identify, assess, and manage elevated risks thoroughly and continuously [1][2][3][4][5].
Financial institutions can improve their EDD policies by consulting with experts, incorporating multiple KYC checks and balances into their identity-verification process, using automated tools to accelerate and improve the KYC review process, building an audit trail to demonstrate their efforts to prevent money laundering, continuously monitoring customers for potential risk factors, monitoring watchlists for updates that may trigger additional EDD protocols, and identifying and verifying the identity of any natural persons, known as 'beneficial owners', of legal entities to comply with CDD.
References: [1] FinCEN [2] FIU [3] OECD [4] FATF [5] U.S. Department of Treasury
- As technology advancements continue, financial institutions might consider integrating cybersecurity measures into their Enhanced Due Diligence (EDD) processes to safeguard sensitive customer data and combat potential cyber threats.
- To bolster their EDD strategies, financial institutions could invest in data-and-cloud-computing solutions to streamline their KYC, CDD, and EDD processes, while also ensuring a secure and efficient data storage and processing system.
- With the increasing importance of social media and online presence, personal-finance educators might stress the importance of cybersecurity best practices for individuals to protect their own financial information and identity.
- In connection to career development, individuals seeking a role in business or finance could focus on acquiring skills-training in data analysis, cybersecurity, and regulatory compliance to enhance their employability and perform successfully within EDD departments.
- Education-and-self-development platforms could collaborate with financial institutions to expose students and professionals to case studies emphasizing Enhanced Due Diligence, allowing them to understand the significance of EDD, particularly in detecting and preventing money laundering and terrorist financing activities.
