Enhanced Due Diligence – What, When and How?

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When the financial institution is dealing with high-risk customers, 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 the risk that the regular background checks process will never reflect.

What is Enhanced Due Diligence?

Enhanced Due Diligence or EDD processes require banks to take a risk-based approach to look into customer KYC. Under this approach, banks verify the identities of their customers and confirm the source of funds is legitimate.

This can be an ongoing process, as existing customers have the potential to transition into higher-risk categories over time. The financial sector is plagued by high-risk category customers across the world. Hence, conducting periodic due diligence assessments leads to AML compliance.

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. Riskpro has derived the risk rating model based on its HRE scores. HRE Stands for Heightened Risk Entities. This model considers 27 different factors to rank the high-risk customers.

Certification for Due Diligence

The Certified Bank Forensic Accountant program deals with different techniques of gathering market intelligence. The due diligence process requires ongoing monitoring of high net worth individuals, site visits and gathering detailed information about the borrower. This course helps the bankers in developing the skills to perform the EDD work efficiently. This course focuses on various sessions to assess the risk. Detailed information on this course is available in the banking fraud section 

Enhanced Due Diligence Factors

There are different factors to consider in the EDD. 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 cryptocurrencies or cash collection

Let’s look at individual risk factors in detail now.

Customer Risk Factors

There are some circumstances that can lead to EDD. Here are six scenarios.

  1. Firstly, customer’s customers are non-residents or foreign citizens.
  2. Secondly, the customer is an asset holding company with no real business.
  3. Thirdly, when the customer is a PEP, or PEP’s family member or known associate. One can check the PEP databases for the same. A 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 greater risks for potential involvement in corruption. The risk they pose is 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. Next, your customer is a cash-intensive business such as the owner of a petrol pump or a retail shop in a big mall.
  6. And lastly, your customer transactions will exceed certain limits in the number of daily cash transactions.

Geographical Risk Factors

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

  1. Countries with inadequate money-laundering prevention systems. For example North Korea and Iran. They are on the black list of FATF. Pakistan is on the Greylist.
  2. Countries under sanctions and embargoes or similar measures.
  3. Countries are known for prevalent levels of corruption. For example Venezuela, Yemen are on the transparency index list.
  4. Countries are blacklisted for financing or supporting terrorist activities. These countries may include Iran, Syria, and Sudan.
  5. Locations where designated terrorist organisations are operating. For example Syria, Iraq and Somalia.
  6. Countries that are not members of the Financial Action Task Force and its partners.

Additional Risk Factors in EDD

In terms of additional risk factor categories, there can be other risk factors that might lead to enhanced due diligence. It 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.

EDD also takes into consideration all relevant negative media related to the account holder. An official document or a post made on the Internet, any information pertaining to money laundering or financial crime forms the part of the examination.