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What is Enhanced Due Diligence?

 
Apr 26, 2021 Erin Fogarty Updated On: December 14, 2023
What is Enhanced Due Diligence?

Enhanced Due Diligence (EDD) is a vital process that protects your organisation from financial crime when doing business with a high-risk customer. Due diligence is a legal requirement for all companies within regulated sectors.

Enhanced Due Diligence in the UK

In 2021, the UK government introduced strict and robust laws to combat money laundering within our economy. These laws dictate that anti-money laundering efforts are a joint venture between the public and private sector, with a huge amount of responsibility placed on the latter.

The UK’s anti-money laundering regulations do not define what specific actions need to be taken for due diligence or EDD; rather enhanced due diligence simply means a more in-depth due diligence process than a company would normally take.

Because of this, every company is responsible for their due diligence procedures and ensuring they comply with UK law, so they must decide exactly which measures should be taken as part of an advanced due diligence check. These will usually involve some of the following:

  • Requesting and checking additional identity and address documents.
  • Performing more stringent checks.
  • Performing full checks on any third party that has been involved in proceedings.
  • Ask for proof of the source of the funds involved in the potential transaction.
  • Seek additional evidence that the ultimate beneficiary is who they say it is.
  • Check for any sanctions against involved individuals or organisations.

If a client is not  forthcoming about requested information, or wants to avoid complying with due diligence process, this can be a warning sign of illegal activity.

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What is Enhanced Due Diligence (EDD)?

Enhanced Due Diligence (EDD) is a vital process that protects your organisation from financial crime when doing business with a high-risk customer. Due diligence is a legal requirement for all companies within regulated sectors.

More at-risk businesses, such as financial institutions, are obligated to perform EDD to ensure they are protected from involvement in financial crime, such as money laundering.

 

Why should you perform enhanced due diligence?

Due diligence is a cornerstone of the UK’s fight against money laundering. Companies having enhanced due diligence processes, and the right to perform them, allows for a greater level of protection for our economy.

Enhanced due diligence also benefits individual companies. As part of the UK’s anti-money laundering regulations, the responsibility for spotting signs of money laundering is on each business. Should a company be found to have facilitated a money laundering scheme, even accidentally, they can face harsh punishments such as fines for the business/responsible employees and jail time. Enhanced due diligence procedures give companies an extra level of defence against this.

All anti-money laundering procedures and processes must be thoroughly documented and available to present to investigators if needed.

How is Enhanced Due Diligence different from Customer Due Diligence? 

Enhanced due diligence (EDD) involves adopting a risk-based approach to further investigate certain clients’ identities and gather further information on their reputation and history.

EDD is only necessary with clients who have been identified as posing a high risk of involvement with financial crimes like money laundering, whereas standard due diligence is applied to everyone involved with the business (suppliers, partners, customers) who aren’t identified as high risk.

Here are summary descriptions below:

  • Enhanced due diligence (EDD)
    • Essentially what its name suggests: the process of investigating a higher-risk customer more thoroughly than you would others.
  • Standard due diligence

When should Enhanced Due Diligence be used? 

Every company should conduct an assessment and identify its highest risk areas. They can then apply enhanced due diligence procedures as a preventative measure. An example of a business deal that should involve EDD would be if the organisation or individual is from a high-risk country with sanctions against them, however, each potential business deal should be reviewed on a case-by-case basis to see if EDD is necessary.

Warning signs to look out for include:

  • Clients seeking undue anonymity or secrecy and not willingly revealing their identity.
  • Clients acting through a third party.
  • A third party not being transparent about whom they are acting on behalf of or who the ultimate beneficiary is.
  • Clients are introduced to you by a third party, as you do not know the due diligence that has taken place.
  • Clients you have not obtained via the methods usual to the business.
  • Clients involved with cash-based businesses.
  • Clients from abroad.
  • Clients from outside the usual customer base.
  • Clients involved in emerging sectors or whose business has recently pivoted.
  • Clients with, or operating for an individual with, a high net worth.
  • Clients wanting to deal in cash.
  • Clients with a criminal history.
  • Politically exposed persons (PEPs).
  • large transactions.
  • One-off transactions.

How to perform Enhanced Due Diligence 

EDD is a complex procedure but manageable when broken down into smaller tasks. Here is a sample enhanced due diligence checklist we at Red Flag Alert have created for businesses to follow:

1)    Adopt a risk-based approach.

A risk-based approach starts by assessing your customers for risk factors and assigning each client a level of risk. You only need to perform EDD on high-risk customers such as those from high-risk countries. 

2)    Obtain additional verification.

Standard customer due diligence (CDD) requires verifying customer identification information (such as their name, date of birth, and residential address) using external documents such as passports, driver’s licenses, or other state-issued identity documents.

Enhanced due diligence requires obtaining extra documentation for identity verification, using more than one external document.

3)    Establish funds' origin and ultimate beneficial ownership (UBO).

Next, you need to obtain information that will indicate the origin of your customer’s wealth. You need to compare the value of your client’s non-financial and financial assets with that of their real assets to make sure that these figures match. Any inconsistencies between their net worth, wealth source, or earnings are cause for suspicion and must be investigated further. 

You also need to establish the ultimate beneficial owner (UBO) of your client’s organisation and double-verify the identity of this owner.

4)    Track ongoing transactions.

 Analyse your client’s transaction history, including interested parties, transaction processing times, and the purpose and nature of their transactions. Be on the lookout for inconsistencies between the projected value of goods and services and the amount paid or received - these mismatches are cause for suspicion. Transaction monitoring plays a massive part in the client onboarding process

5)    Check for adverse media coverage.

Analyse media coverage about your client to gather information about their track record and reputation, identify adverse media and PEPs. Past accusations of financial crime - even if unfounded - are cause for close future monitoring. Established involvement with financial crimes flags a high risk of your business becoming involved in these activities.

6)    Conduct an on-site visit.

Visit your client’s physical business address to verify that they are who they say they are, and that their actual operation address matches the address on the documentation they have provided. If these addresses do not match, or the organisation you find is not what you expected based on the information your customer presented to you, this is cause for concern.

An on-site visit may also be necessary to obtain physical verification documents that cannot be digitally sourced.

7)    Create a further investigation strategy report.

Once you have completed all the above steps and if you have decided that the client in question is not too high-risk for you to continue your relationship with them, you need to write up a report detailing your EDD plans for monitoring your client going forward.

This report should include a timetable indicating when you will carry out specific monitoring activities. Your report should then be stored in a secure location, alongside all the information you have gathered up to this point.

8)    Develop an ongoing monitoring strategy.

Craft a strategy for continuous monitoring of your client in the future. This should be done in combination with a review of data they have already provided. Certain transactions may not seem suspicious in isolation but may form part of a continuous pattern of activities that indicate illicit activity when viewed as a whole.

How can Red Flag Alert help with your due diligence strategy?

 Enhanced due diligence is not just a legal requirement, but every company’s duty to combat financial crime and other malicious activities. To help businesses navigate regulations, Red Flag Alert developed an AML service in conjunction with Begbies Traynor plc and GB Group plc to assure businesses that they are compliant. We’re confident we have the simplest and most comprehensive solution in the UK market. We offer:

  • A full range of risk-level checking
  • Unbeatable match rates
  • ID verification
  • Enhanced due diligence.
  • Sanctions and real-time screening of politically exposed persons
  • Monitoring alerts
  • A Simple interface
  • A Secure audit trial.

By starting your free trial today, find out how you can deploy Red Flag Alert’s AML KYC platform to manage anti-money laundering risk.

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Published by Erin Fogarty April 26, 2021

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