Enhanced Due Diligence (EDD) is a process that provides a greater level of scrutiny of potential business partnerships and highlights risk that cannot be detected by Customer Due Diligence (CDD) . EDD goes beyond CDD and looks to establish a higher level of identity assurance by obtaining the customer’s identity and address, and evaluating the risk category of the customer. Enhanced due diligence is specifically designed for dealing with high-risk or high-net worth customers and large transactions. The process involves gathering information to authenticate clients identities and quantify the amount of money laundering risk each customer poses. EDD procedures lower the chances of money laundering and terrorist financing through organizations by detecting and investigating high-risk customers and suspicious transactions.
EDD is required for companies that are doing business with high-risk individuals or organizations, such as those in countries on the High-Risk Third Countries list, Politically Exposed Persons (PEPs) or their close circles, companies in sectors with a higher risk of money laundering, shell corporations, ultimate beneficial owners, companies that funded terrorist activities and blacklisted, and private and correspondent banking.
The requirements for completing EDD vary depending on local regulations, but it is typically required when entering into a business relationship with a PEP, when the transaction involves a person from a high-risk or sanctioned country, or in any other situation with an increased risk of money laundering.
EDD is important because it helps companies identify and assess the money laundering and terrorist financing risks of each of their customers. It is essential for companies to adopt risk-based monitoring strategies to detect suspicious behavior or changes in the risk profile of that customer.
To execute EDD, companies should conduct a series of tests (risk and compliance checks) to detect any financial crime risks. Risk management procedures often differ based on a customer’s risk profile, and it starts by taking steps to ensure you know who you are dealing with, understanding their activities, and assessing their risk of money laundering.
