Banking and Finance
Financial compliance is the regulation and enforcement of the laws and rules in finance and the capital... View more
Financial compliance is the regulation and enforcement of the laws and rules in finance and the capital markets. It ranges through the entire financial spectrum, from investment banking practices to retail banking practices.
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What is Enhanced Due Diligence in Banking?
What is Enhanced Due Diligence in Banking?
When is enhanced due diligence in banking required?
Enhanced Due Diligence is required where the customer and product/service combination is considered to be a greater risk. This higher level of due diligence is required to mitigate the increased risk. A high risk situation generally occurs where there is an increased opportunity from money laundering or terrorist financing through the service and product you are providing or your customer.
What the enhanced due diligence actually entails will be dependant on the nature and severity of the risk. The additional due diligence could take many forms from gathering additional information to verify the customer’s identity or source of income or perhaps an adverse media check. The checks should be relative and proportionate to the level of risk identified and provide confidence that any risk has been mitigated and that the risk is unlikely to be realised.
There are a number of situations that can be counted as high risk such as where you do not meet your customer face to face or where you are dealing with a politically exposed person. A high risk customer does not mean that they will be involved in money laundering or other criminal activity but that there is an increased opportunity to be involved.
What is KYC?
KYC or “Know Your Customer” is a process of obtaining information about your customers for identification purposes. The KYC process is usually carried out by companies and other financial institutions when opening accounts with them.
What is Customer Due Diligence | CDD?
Customer Due Diligence is a KYC process of doing background checks on your customer to assess the risk they pose, before dealing with them. In the financial sector, business relationship risks stem from financial crime, credit worthiness and poor Anti-Money Laundering or Counter-Terrorist Financing (AML/CTF) policies.
What is Enhanced Due Diligence | EDD?
Enhanced Due diligence is a KYC process that provides a greater level of scrutiny of potential business partnerships and highlights risk that cannot be detected by Customer Due Diligence.
What is the difference between CDD and EDD?
The difference between Customer Due Diligence and Enhanced Due Diligence is that CDD is a less strict verification procedure where you obtain the customer’s identity, address and evaluate the risk category of the customer. While Enhanced Due Diligence is required for customers who are classified under the high risk category based on a KYC risk rating system.
For any financial institution, customer due diligence (CDD) is par for the course; you need to take steps to Know Your Customer (KYC) to comply with Anti-Money Laundering laws (AML), as well as protect yourself from bad actors and fraud. What are effective enhanced due diligence procedures you can use to minimize risk and maintain effective compliance standards when onboarding high-risk customers?
Risk management procedures often differentiate based on a customer’s risk-profile. It starts by taking steps to ensure you know who you are dealing with, understanding their activities and assessing their risk of money laundering.
A proper customer identification program (CIP) — whether it’s an individual or business — is the starting point. After all, if you don’t know who you are dealing with, how can you vet them? Gathering fundamental identifying information and validating that information is the first step to CDD compliance and reducing risk.
After that, you need to determine what is normal and expected activity for that prospective account-holder? These determinations might be based on a customer classification system that you have put in place or on the type of account; either way, with a risk-based approach, clearly defined policies makes it easier for staff to implement analysis and compliance staff to report to regulators, if necessary.
Enhanced Due Diligence Factors
Factors to consider if a potential account requires enhanced due diligence (EDD) includes:
- Location of the business
- Occupation or nature of business
- Purpose of the business transactions
- Expected pattern of activity in terms of transaction types, dollar volume, and frequency
- Expected origination of payments and method of payment
- Articles of incorporation, partnership agreements and business certificates
- Understanding of the customer’s customers
- Identification of beneficial owners of an account or customer
- Details of other personal and business relationships the customer maintains
- Approximate salary or annual sales
- AML policies and procedures in place
- Third-party documentation
- Local market reputation through review of media sources
In many cases, there are explicit legal specifications that automatically call for EDD. For example, in Europe under Article 18 of 4AMLD, any business located in a country on the High-Risk Third Countries list requires EDD. Similarly, any Politically Exposed Persons (PEPs) or their close associate or family members also must go through the more thorough examination process.
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