Enhanced due diligence refers to a comprehensive KYC due diligence that includes a risk assessment. EDD banking was created considering large transactions and high-risk customers. Risky consumers and transactions put the financial industry at greater risk, yet CDD methods cannot detect them. EDD processes were utilized in this case to increase identification assurance by checking the customer’s identity and evaluating the client’s risk category. Furthermore, where there is a higher risk of money laundering, terrorist funding, these measures are necessary to mitigate the elevated risk.
FATF Recommendations for High-Risk Transactions
For handling high-risk clients or transactions, the FATF suggests using a risk-based strategy. All businesses, particularly financial institutions, are required to create a risk-based approach to examine terrorist financing and money laundering. To properly limit the risk of these kinds of transactions, they must implement AML and CFT procedures. In the RBA, businesses must evaluate the implications of high-risk transactions upon their activities. The risk-based approach, according to FATF guideline 40, allows nations to employ flexible measures for successfully focusing their resources.
KYC Due Diligence financial services are used to implement EDD compliance. Companies can benefit from these solutions in a variety of ways, including the identification of important risk issues and the use of accurate data in a well-structured fashion. Many software and services, on the other hand, are insufficient, complicated, and also have a poor conversion rate. To avoid this, the company should select software that is appropriate for the demands of its business.
EDD in Banks
The banking sector is a fast-paced setting. Policies and methods in this field are rapidly evolving. Regulations, particularly those relating to financial crime, must be followed by large corporations. Based on specific activities, potential consumers may trigger additional clients due to diligence evaluations. Banks and other high-risk businesses must carefully perform an Enhanced due diligence program. As a result of these regulations, many banks, particularly those with a global presence, have enacted risk mitigation measures. Banks favor these steps to avoid penalties due to non-compliance with rules and to safeguard their reputation.
Steps of EDD Process
Enhanced due diligence is a concise process that takes only a few minutes to complete. Here’s how EDD banking works, according to several regulatory agencies’ guidelines:
To begin, a risk-based methodology is devised for categorizing all clients into several groups. Classification aids in a deeper understanding of clients and makes acquiring relevant information more accessible for the business.
Create EDD Checklist
Anti-Money Laundering rules and verification procedures for high-risk customers are now being prepared using a checklist. It also is called an “improved or enhanced due diligence checklist” because it compiles all of the necessary data in one place.
Assess Funding Source and UBOs
Knowing the clients’ sources of income are critical to avoid money obtained illegally entering the company. The amount of the customer’s financial as well as non-financial resources should be known to do more effective validation. For EDD in banking or any other sector, the legality of the source of funding is critical. The verification is promptly halted if the system discovers any differences in statements or records. During the examination of the industry’s UBOs, affiliates and beneficial owners must be checked especially in B2B transactions.
Ongoing Transaction Monitoring
Clients’ transaction histories are evaluated in this stage. When monitoring transactions, the period of transactions, the recipients of payments, and other details are taken into account. Aside from these facts, enhanced due diligence examines the threshold of each transaction performed by the consumer.
Evaluate Business’s Local Reputation
All available data may not always be able to provide an accurate picture of a brand’s popularity among local clients. Enhanced due diligence in banking also looks at the company’s local reputation when dealing with high-risk deals. This is accomplished by examining local media sources like social media sites, news, and so on.
Physical Address verification
The address is also checked through physical visits, as a part of EDD banking for high-risk transactions. It is performed to verify that evidence of address is provided, i.e. that the address mentioned on the document is correct and that the customer is related to it. If physical address validation is not feasible, risk must be controlled by doing digital address and document verification using the most recent documents available, such as bank accounts and utility bills.
While the extent and details of expanded CDD procedures grow, the technologies used to implement them improve. There are options for dealing with danger, securing the firm, and expanding it. As cyberattacks and financial crime become more prevalent, financial institutions must focus on preventing money laundering and bribery while also establishing a reputation for being strict guardians of their clients’ information and cash. Following KYC and EDD procedures demonstrates that the business is legally focused on existing and potential clients.
With EDD banking, the entity can identify its clients, verify their identity, ensure they’re not on any restricted lists, and evaluate risk factors, preventing money laundering, terrorism funding, and other forms of fraud. As a result, the sector not only gets to know and service its clients better, but it also has more time to focus on building its business.