According to UN estimates, the scale of money laundering in the world reaches $2 trillion annually, or up to 5% of global GDP.
These figures are impressive, especially given how much effort is paid to the problem — by governments, financial institutions, legislators and regulatory bodies.
So is it possible to make a difference? And what does due diligence mean in the process? This article will answer those questions.
What Is Enhanced Due Diligence (EDD)?
EDD is the main tool companies use to protect themselves from cooperation with dubious clients. It is a part of a wider process, known as KYC (Know Your Customer).
In simple words, we can define enhanced due diligence as a more thorough check by financial organisations on certain categories of customers. If a client falls under a high-risk category — for instance, they are a politically exposed person (PEP) or a citizen of a high-risk country — they must be checked more thoroughly. That is, companies can request additional documents from them, check mentions of a person in the mass media, etc.
EDD is a mandatory procedure in most jurisdictions. Violation may result in serious fines and criminal liability for companies.
At the global level, industry standards are determined by the Financial Action Task Force (FATF). This is an intergovernmental organisation that aims to prevent financial crimes. As of now, 37 countries joined the organisation.
Following FATF recommendations, the authorities are introducing regulations and enshrining in law AML/KYC requirements for companies.
Beyond PEPs. Which Customer Categories Need EDD?
When talking about due diligence, PEPs are mentioned first and foremost. However, the FATF mentions a much broader list of cases where companies should carry out additional verification. Among them:
- Unusual factors associated with the cooperation — such as a large territorial distance between the company and the client.
- Clients from foreign countries (non-residents).
- Sanctioned persons.
- Companies with owners or shareholders who play only a nominal role.
- Organisations with a complex or closed beneficial ownership structure.
- Clients from sanctioned countries and countries where AML/KYC legislation is not implemented.
- Presence of anonymous and suspicious transactions.
- Customers with excessive wealth and any transactions involving large funds.
If there is any suspicion regarding money laundering or terrorist financing activities, FIs must take appropriate due diligence and report violations to the authorities. Monitoring should be done regularly, not just before onboarding new customers.
Which Factors Indicate a Need for Enhanced Due Diligence?
As mentioned above, due diligence is only needed for certain individuals and businesses. Here are some factors companies should consider:
- Client factors — personal history, career, reputation, PEP status or PEP affiliation.
- Geographic factors — citizenship of sanctioned countries, countries with a high level of corruption, countries with no AML legislation, business in regions with terrorist activity.
- Other risk factors — industries with a high level of privacy, such as the private correspondent banking sector, may be subject to MLFT crimes. This is due to the nature of their activities.
What Does Effective EDD Involve?
The due diligence process raises many questions for companies because they do not always have the most appropriate plan of action for high-risk customers.
On the one hand, you can’t be too careful in protecting your business. On the other hand, by complicating the verification process, you risk losing prospective clients.
The steps below help companies to find the best solution.
The risk-based approach represents the "gold standard" in the field of AML compliance, and it is also recommended by the FATF as a standard setter.
According to this approach, verification should not be the same for every client. There is a need for a detailed review only when the business relationship is risky. In other words, the amount of information requested from the clients will directly depend on the risks that they represent.
Define internal EDD standards within your company. For example, a checklist with information to request from high-risk customers.
Checking the origin of funds
When dealing with a new client, one should understand the nature and the origin of their funds. Otherwise, your organisation may become a laundromat for the wealth of corrupt officials and scammers.
When working with legal entities, it is crucial to identify Ultimate Beneficial Owners (UBOs).
Check the customer's current transactions.
Adverse media screening
A quick Google search can reveal crucial details. For example, if the potential client was involved in scandals in their country, had high-profile litigation, etc.
Read the information on the company's website. Does the physical and legal address match? Are the required registration documents submitted? Is information about the owners public?
Customer activities can change at any time. IT solutions will help you to keep up with the dynamic business environment and information flow. LIGA UNITED won’t miss any changes in company registration data, negative media mentions or litigation updates.
How Is Enhanced Due Diligence (EDD) Different From Customer Due Diligence (CDD)?
The difference between CDD and EDD lies in the depth of verification and the requested information. One or another approach is chosen depending on the risks associated with the client. Overall, there are 3 types of verification.
- Simplified customer due diligence — identification only.
- Standard customer due diligence — identification and verification by an independent source.
- Enhanced customer due diligence — applies to high-risk individuals. Additional information may include confirmation of the client's sources of wealth, their activities, etc.
How To Perform Enhanced Due Diligence
So, when communicating with a new client, your firm discovers that they require an EDD. How to proceed in this case?
Now you need to request additional information to analyse and draw conclusions regarding the risks of cooperation. It is critical to see a "clear picture" of risks and to ensure protection against risks — both current and future. This is the main task of due diligence checks.
The information you request will depend on the specifics of your company and jurisdiction. The client evaluation is usually supported by the following data:
- For individuals: information from open sources, such as presence on sanctions lists, and negative media mentions, that may indicate a propensity for financial crime. Details about the origin of funds, and the source of wealth. Client career and connections.
- For companies: information from open sources, including the media, registers, and sanctions lists. Checking information on the official website. In addition, it is important to identify the ultimate beneficial owners and decision makers within the company.
IT solutions will help you to complete client reports more efficiently, and protect your company from risks.
Be sure about your customers with LIGA UNITED
The reputation of companies is gaining increasing importance nowadays and directly affects their profits. That is why enhanced due diligence is more than just a routine operation required by regulators. The good name of your business depends on this process.
RegTech solutions will help you find complete information about customers. They can quickly analyse a large array of data and identify risks. Any changes will be notified instantly with automatic monitoring.
Using LIGA UNITED risk check & monitoring platform, you can be sure about every partner, customer, or supplier. The platform unifies multiple sources of data, including the UK registers, worldwide sanction lists and thousands online media, to check:
- Company status and general info.
- Links with Russia and Belarus.
- Ownership structure, ultimate beneficial owners (UBOs).
- Presence in sanction lists.
- Negative media coverage.
We combine data from multiple streams and offer a unique visualisation of company links, so your organisation can be 100% sure about every decision.
Book a demo to see LIGA UNITED in action.
EDD is a type of due diligence check for high-risk individuals or businesses. Compared to the regular procedure, it requires a profound analysis of open sources and information provided by a customer.
EDD is mandatory for clients, which are more likely to be involved in financial crimes, such as PEPs and their associates, citizens of high-risk countries, etc.
EDD is a part of a wider process, known as KYC (Know Your Customer). Banks or financial institutions do not usually go beyond checking the identity of the client, but they may pay closer attention to customers with excessive wealth, former politicians, or foreigners.