Enhanced Due Diligence – What, When and How?

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When the financial institution is dealing with the high risk customer, they have to go beyond basic customer due diligence. Though it is a KYC process, Enhanced due diligence provides a greater level of scrutiny of potential business partnerships. It highlights risk that regular customer due diligence process will never reflect.

What is Enhanced Due Diligence?

Enhanced Due Diligence (EDD) requires financial institutions to take additional steps of examination and caution to identify their customers and confirm that their activities and funds are legitimate. Sometimes referred to as “special due diligence”

This can be an ongoing process, as existing customers have the potential to transition into higher risk categories over time. In that context, conducting periodic due diligence assessments on existing customers can be beneficial.

A major problem during EDD is understanding how much information about a customer is necessary. The solution to this problem can be a factor-based risk rating approach.

Enhanced Due Diligence Factors

There are different factors to consider the enhanced due diligence. These factors are

  1. Customer Jurisdiction
  2. Nature of Customer Business
  3. Customer Activity
  4. Transaction frequency
  5. Customer Transaction Value
  6. Payment methods like crypto currencies or cash collection

Let’s look at individual risk factors more detailed.

Customer Risk Factors

In terms of the customer risk factors, there are six attributes that can lead to EDD.

  1. Firstly, the bulk of your customer’s customers are clients that are foreigners or non-residents.
  2. Secondly, your customer is an asset-holding vehicle.
  3. Thirdly, your customer is a PEP, or PEP’s family member or known associates. You can check the PEP databases for the same. Politically exposed person is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold.
  4. Next, your customer has nominee shareholders or shares of the company are issued in bearer form.
  5. Fifthly, your customer is a cash-intensive businesses.
  6. And lastly, your customer transactions will exceed certain limits in the amount of daily cash transactions.

Geographical Risk Factors

Secondly, there are geographical risk factors that can lead to EDD. These factors include the following six attributes.

  1. Firstly, countries without adequate anti-money laundering prevention systems as identified by credible sources. For example North Korea and Iran, are in the black list of Financial Action Task Force as having material deficiencies.
  2. Secondly, countries under sanctions and embargoes or similar measures.
  3. Thirdly, countries notorious for prevalent levels of corruption as identified by credible sources. For example Venezuela, Yemen are on the transparency index list.
  4. Fourthly, countries blacklisted for financing or supporting terrorist activities. According to the State Sponsors of Terrorism list, these countries include Iran, Syria, and Sudan.
  5. Fifthly, locations that have designated terrorist organisations operating within their country. Examples for this are Syria, Iraq and Somalia.
  6. Lastly, countries that are not members of the Financial Action Task Force and its partners.

Additional Risk Factors in Enhanced Due Diligence

In term of additional risk factor categories, there can be other risk factors which might lead to enhanced due diligence, but which is rather individual to certain types of organizations or financial institutions. This includes private and correspondent banking for example.Hence, they are naturally more prone to money laundering than others.

Enhanced due diligence also takes into consideration all relevant adverse information related to the risk factors defined above. Whether an official document or something posted publicly on the Internet, any information that pertains to money laundering or corruption must be thoroughly considered.