Enhanced Due Diligence (EDD) is another essential element of KYC solutions. It involves the thorough examination of certain clients using a risk-driven methodology. This process might require relatively more evidence regarding the client’s past and their prestige. EDD is mainly used for customers whose net worth is significantly high, or the ones who execute unusually substantial transactions bearing huge sums. There is generally a more significant risk associated with such dealings. It is noted that each year the flow of unusual cash transactions amounts to about $2 trillion through the international financial system. This is true even though financial institutions and government bodies constantly strive to preserve financial steadiness through relevant regulations that are frequently revised. Thus, it is imperative that organizations endeavoring to safeguard themselves from financial crime have a better understanding of clients. That is where EDD comes in.
Why is Enhanced Due Diligence Required?
All financial institutions and cryptocurrency firms are legally required to enforce Customer Due Diligence (CDD) procedures as a component of AML regulations. Additionally, EDD standards must also be applied alongside CDD measures to verify transactions. So, Enhanced Due Diligence AML procedures are mandatory to remain safeguarded from financial crime. In addition, it is also crucial to have an appropriate strategy of how to implement EDD procedures effectively. Let’s explore how.
Risk Management
Risk governance procedures also play a crucial part in preventing fraud. Risk-based processes are typically distinguished as per the risk portfolio of the client. This process should typically begin with knowing and understanding the clients you are working with and having a comprehensive overview of their movements. The threat of money laundering associated with the client would also be measured through enhanced due diligence.
When it comes to verifying an individual’s or an enterprise’s identity, putting in place a proper client identification scheme would usually be the first order of business. It is imperative to have an accurate profile of the client the firm is liaising with, and thus, the procedure should also be easy to comprehend and client-friendly. To reduce risk and enjoy an ethical business relationship, adherence to enhanced due diligence AML policies is required.
Client Activity Determination
Ultimately, businesses must know what to expect from the forthcoming client. To accomplish this, companies can put in place a system whereby clients can be categorized according to the types of their accounts. It can also be based on the types of activity should there be such similarities among clients. This way, it will be easier to apply analysis techniques and to report suspicious activity if found.
KYC Enhanced Due Diligence Factors
Certain important markers should be taken into consideration if a prospective client account should require enhanced due diligence. These factors comprise
- Business location
- Domain of the enterprise
- Pattern of potential activities of the client
- Objective of the transactions
- Potential sources of funds
- Details of other professional alliances the client may hold
- Their AML practices and policies
- The expected sales of the client
- Relevant business documentation
- Their rapport and reviews, for instance, on social media platforms
In several instances, most precise legal guidelines require Enhanced Due Diligence checks. For instance, in Europe, 4MLD Article 18 implies that businesses that fall under the list of third-world countries under heightened risk are legally obliged to follow EDD procedures. To add further, if an individual or company holds political affiliations, they are also mandated to go through careful Enhanced Due Diligence checks. Additionally, industries that carry a greater threat of financial fraud, for example, the online gaming sector, are usually required to undergo strict Enhanced Due Diligence procedures. Furthermore, several regions usually have minimum limitations to the amounts of transactions. If those limits are surpassed, EDD regulations come into play.
Deeper Enhanced Due Diligence
Sometimes, there might be possibilities with high value but that contain a lower threat. In such cases, the EDD process usually requires collaboration with an outside source, typically a third party for examinations prior to and after the onboarding process. Sometimes, the potential clients interact with the company’s legal council directly. Blockchain transaction tracking and support for asset tracking are some important aspects of this process. Furthermore, when measuring the proportion of risk, the EDD process also demands reasonable certainty. This means that the EDD team required to make the decisions is required to successfully implement all the stages in the EDD process.
Conclusion
With the growing number of criminal practices, firms must be able to keep up with Enhanced Due Diligence regulations. Companies need to be adaptable and creative regarding their methodology for EDD procedures and AML. Technical EDD solutions are quite helpful in combating financial crime. However, human caution is still necessary to identify and deal with emerging threats. Therefore, firms need to have proper and efficient EDD processes in place.