What is enhanced due diligence?

Mark Halstead Compliance

Enhanced due diligence (EDD) is vital to protecting your organisation from financial crime (including money laundering and terrorist financing) when doing business with a high-risk customer.

In this article, we talk about what EDD is, how it differs from standard customer due diligence, which clients warrant EDD measures, how to carry them out, and how Red Flag Alert can help.

How is enhanced due diligence different from customer due diligence?

Enhanced due diligence (EDD) is essentially what its name suggests: the process of investigating a higher-risk customer more thoroughly than you would others. It is most easily explained via comparison to standard customer due diligence (CDD). 

Standard due diligence, or know your customer (KYC), is an identity verification process that must be performed for every customer a company does business with. 

EDD involves adopting a risk-based approach to investigate certain clients' identities even further, and gathering 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. 

Which clients warrant enhanced due diligence measures?

EDD can be done via a risk-based approach, as it is only necessary for high-risk customers or clients. When assessing customer risk for EDD purposes, be on the lookout for:

  • Clients who are politically exposed persons (PEPs), in other words people with high-profile political roles or who perform prominent public functions
  • Clients who are special interest persons (SIPs), in other words those who have a known history of involvement with financial crimes. A person doesn’t have to have been convicted to be considered an SIP. They could have been previously accused of financial crimes, or be currently facing court proceedings.
  • Clients who have sanctions against them
  • Clients who feature in a high volume of adverse media, in other words negative media coverage about them
  • Clients who have a high net worth
  • Clients who are involved in unusual, complex, or seemingly purposeless transactions

A customer is also considered high-risk and warranting EDD if they are directly linked to any of the following geographical risk factors:

  • Countries that have sanctions or embargoes against them
  • Countries on the Financial Action Task Force’s (FATF) list of Other Monitored Jurisdictions (greylist)
  • Countries on the FATF list of Call for Action Jurisdictions (blacklist)
  • High-risk third countries
  • Countries containing proscribed terrorist organisations (Bear in mind that the UK is on this list)

The above geographical risk factors indicate a higher risk of terrorist financing.

Furthermore, any client using private or correspondence banking can be considered a high money laundering risk and should be subject to EDD, as these banks’ high levels of confidentiality make them more likely to be involved with money laundering. 

How to perform enhanced due diligence

EDD is a complex procedure, but it’s manageable when broken down into smaller tasks. Here is a sample enhanced due diligence checklist for follow:

Adopt a risk-based approach

Start 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, as we defined above.

Obtain additional verification

Standard customer due diligence 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.

Establish the origin and ultimate beneficial ownership (UBO) of funds

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 ownership of your client’s organisation, and double-verify the identity (as discussed above) of this owner.

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.

Check for adverse media coverage

Analyse media coverage (for example news reports) about your client to gather information about their track record and reputation. 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.

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.

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.

Develop an ongoing monitoring strategy

Craft a strategy for continuous monitoring of your client in the future. This should be done in combination with 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 Red Flag Alert can help

Enhanced due diligence is not just a legal requirement, but every company’s duty to help combat financial crime and other malicious activities. 

To help businesses navigate these regulations, Red Flag Alert has developed an anti money laundering service to assure businesses that they are compliant. The service was developed in conjunction with Begbies Traynor plc and GB Group plc, and we’re confident it’s the simplest and most comprehensive solution on the market in the UK. Red Flag Alert offers:

  • 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 trail

To speak to one of our team in more detail about how to deploy Red Flag Alert to manage anti money laundering risk, please get in touch with Richard West at richard.west@redflagalert.com or 0344 412 6699.

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Mark Halstead Partner

Mark's experience is big data analytics, financial services and building businesses provides Red Flag Alert with strategic direction.