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In today’s time, getting into business deals has become unexceptional. Everyday lots of deals are happening and business involves dealing with customers.
You need to be very cautious while dealing with customers. They should not be involved in any money laundering activities or terrorism financial activities.
Customers and transactions are exposed to high risk to the financial sector, because of this enhanced due diligence is designed.
Enhanced due diligence is mapped out for the high net worth customers and large transactions.
This is very crucial for protecting your organisation from financial crimes, like money laundering and terrorist financial transaction. Therefore, it provides high level security to the business of the organisation.
What is Enhanced Due Diligence (EDD)
Enhanced due diligence means advance level of KYC (know your customer) due diligence, that provides further investigation. it is beyond customer due diligence and it establishes a high level of security by maintaining the customer identity, and it risks frees the organisation.
An organisation should take necessary steps to assess the money laundering and terrorist financial transaction of their customers. Helps in evaluating the risk category of the customer.
How to Perform Enhanced due diligence
1. Assess the risk
Assessing the risk gives you a detailed understanding about the level of risk of the customers. Therefore, on high- level of customer risk, enhanced due diligence is performed.
2. Obtaining additional verification
Collect the additional information about the high risk customer by providing them with a questionnaire as per the risk policies, to know about the customer in depth. Preferably filled by the third party.
3. Analysing the source and ultimate beneficial ownership (UBO) of funds
The importance of this step is to identify the origin of the customer’s wealth.
It helps in verifying the financial and non financial assets with the real one (on-site).
Gathering the basic details about the customer's work, looking into the legitimacy of assets, can be done easily by the professionals.
If there is any disparity between the source of income, wealth or overall net-worth should be highlighted. Check the authenticity of the inheritance, sale or purchase of any asset.
4. Track ongoing transaction
Have a clear understanding about the purpose and nature of the transaction.
Extra details should also be monitored like, the parties involved in the transaction, Any crypto transactions are made, the nature of the cryptocurrency.
Any inconsistencies in the projected value of goods and the amount
5. Check on adverse media
You need to look for the news, press articles related to the customers, collect all the information and analyse them and make a customer profile.
Therefore, this step helps in identifying risks attached to the customer which are harmful for the business.
6. Conduct an on-site visit
On site to the physical address as per the client’s details should be visited to verify it legally.
As where the documents are not presented digitally can be verified physically.
Original Address as stated should match the physical address as stated, as there is no breach.
7. Draft the strategy report for further investigation
At this step you need to decide whether the client is in the category of high risk or not.
You can make the scoreboard based on the risk of a client, and accordingly you can take the necessary steps for high risk profile clients.
Who requires enhanced due diligence?
Enhanced due diligence is done by the those firms involving high risk clients, like those clients which indicates high risk money laundering or involved in terrorism funding activities.
Therefore, it is required for individuals, like senior foreign political figures (SEPs) and politically exposed persons (PEPs), businesses, and financial institutions (like banks, non-banking companies).
This implies that the organisation has verified the customer details and have understood their clients.
When to do enhanced due diligence
For the prevention of money laundering and terrorism funding activties, enhanced due diligence is the requisit process to perform.
Politically exposed persons (PEPs) are prone to corruption and miss utilise their position for money laundering activities, therefore these are classified as high risk clients.
Enhanced due diligence is performed before doing business with any of the companies or persons, including financial transactions and money deposits.
When companies are doing business with any of the following organisation or persons enhanced due diligence is done:
1. Politically exposed persons (PEPs), any persons related to such
2. Any business in the high risk countries
3. Companies operating in high risk sectors
4. Companies which funds terrorist activities and are blacklisted
5. Companies who supports terrorist organisation and those who have been delisted
Requirements of enhanced due diligence
1. Understand the risk profile of your clients
2. Gather all the informations in addition, which is necessary
3. Check the source of funds
4. Get the background checks
What is customer due diligence
Customer due diligence is the verification process of a customer, requires id information and address, therefore it assesses the risk attached to it.
Like, it always includes a close look at the company’s customer base. Therefore , it is done to check the background of the customer base.
Customer due diligence is the element of the KYC process, as it complies with Anti Money Laundering (AML) and also helps in protecting the organisation from financial crime.
What Customer due diligence form
A document which a financial institution or a bank creates to collect the information about the customer during the process is called customer due diligence.
Because of this process, it helps the organisation to have a check on information provided by the customer.
Difference between due diligence and enhanced due diligence
Due diligence is a detailed investigation and verification of financial records before entering any financial transaction.
This process is initiated to target any risk involved in the proposed transaction to finalise the potential deal.
Due diligence is the process which occurs before the merger and acquisition of any business or a company.
Enhanced due diligence provides you with a high level of scrutiny of the customer base of an organisation. Whereas, it is specifically designed to identify high-risk customers and large transactions.
Enhanced due diligence refers to a thorough KYC due diligence procedure that includes additional risk analysis. EDD is made to deal with high-risk clients and big transactions.
It helps them build a better relationship with their customers, reduce risk by anticipating problems before they become problems, and protect themselves from exploitation by ensuring they know what's going on at every relationship stage.
By investigating their risk profiles, backgrounds, and other factors, enhanced due diligence helps businesses in learning more about their clients. It lessens the workload for firms and encourages them to concentrate more on expanding their businesses.
- Understand the risk profile of your clients
- Gather all the information
- Check the source of funds
- Get the background check