A Guide to Enhanced Due Diligence for Businesses and Organizations

Enhanced due diligence is a crucial step in ensuring the integrity and security of businesses and organizations. It involves a thorough and meticulous examination of potential risks and vulnerabilities.

This process can be time-consuming and requires significant resources, but it's essential for mitigating potential threats. The key is to identify and address potential issues before they escalate.

A well-structured enhanced due diligence process can help businesses and organizations avoid costly mistakes and reputational damage. It's a proactive approach that pays off in the long run.

By investing time and effort into enhanced due diligence, businesses can establish a culture of transparency and accountability, which is essential for building trust with stakeholders.

Enhanced Due Diligence (EDD) is an advanced risk assessment process that involves gathering and analyzing information about high-risk customers or business relationships to identify and mitigate potential financial crimes.

EDD is an extended version of the standard Know Your Customer (KYC) and Anti-Money Laundering (AML) process, intensifying the scrutiny of potential business partnerships to uncover risks not detectable through standard due diligence.

To implement EDD, businesses must collect customer information, such as their name, date of birth, and address. This is a crucial step in understanding who their customers are and what they're involved in.

Identifying the customer's beneficial owner is another essential procedure in EDD. This involves determining who ultimately benefits from the business relationship, which can help prevent money laundering and other financial crimes.

Defining the purpose and intended nature of the business relationship is also a key part of EDD. This helps businesses understand why a customer wants to establish a relationship with them and what they plan to do with it.

EDD measures consist of different procedures, including:

These procedures are designed to check and monitor high-risk or high-net-worth customers and their high-volume transactions, ensuring compliance and integrity within the financial sector.

High-risk customers are typically individuals or entities that present increased risks of financial crime or regulatory breaches. They include Politically Exposed Persons (PEPs), customers with complex ownership structures, non-residential customers, and customers with links to high-risk countries.

High-risk customers may engage in fraudulent activities or attempt to instigate a cybersecurity breach. They can also pose a threat to a company and its operations, giving rise to compliance concerns.

Examples of high-risk customers include individuals with dubious reputations, customers associated with industries deemed as high-risk, and customers with unusual account activity. These customers may require enhanced due diligence to mitigate risks linked to concealed ownership and illicit activities.

Some common examples of customers who always require EDD include high-risk customers such as PEPs or known criminals on watchlists and their close family members. They also include businesses that engage in anonymous transactions without face-to-face interaction and cash-intensive businesses that carry elevated risk due to a significant volume of cash transactions.

Here are some key characteristics of high-risk customers:

These customers require careful scrutiny and may need to undergo enhanced due diligence to ensure compliance with anti-money laundering regulations.

To collect data for enhanced due diligence, you'll need to gather comprehensive business information about high-risk customers. This includes acquiring detailed data on ownership, key stakeholders, and business activities.

Business information is essential in understanding the customer's risk profile. For corporate customers, this means collecting information about their ownership structure, key stakeholders, and business activities.

Beneficial ownership is another critical aspect of collecting data. This involves assessing the individuals who ultimately own or control the customer entity to mitigate risks linked to concealed ownership.

Source of funds is also crucial in verifying the legitimacy of a customer's wealth and funds. This requires clarifying the legitimate sources of a customer's wealth and funds, ensuring they are free from illicit activities.

Enhanced identity verification is a must for high-risk customers. This involves implementing more robust identity verification processes and adding additional documentation or verification methods, such as selfie verification or address verification.

Here are the key data collection requirements for high-risk customers:

These requirements will help you collect the necessary data to assess the risk associated with high-risk customers and ensure compliance with regulatory requirements.

Conducting Due Diligence involves a series of steps that help identify potential risks.

The Enhanced Due Diligence process typically involves screening and monitoring potential risks, which is a crucial step in identifying and mitigating threats.

To maintain clear records of the EDD process, businesses must collect and maintain compliance reports, which can be achieved by leveraging efficient risk assessment systems.

The Enhanced Due Diligence process typically involves several key steps. It's essential to break down these steps to ensure a thorough investigation.

The first step is to identify the customer and gather relevant information about them. This includes checking their transaction history.

Companies should ensure that the accuracy of this step meets the expected threshold. This means verifying the information through multiple sources.

The Enhanced Due Diligence process also involves tracking ongoing transactions. This includes investigating the purpose and nature of transactions based on their processing times and interested parties.

Transaction details should be thoroughly investigated to ensure compliance with regulations. This may involve reviewing financial records and other relevant documents.

If a customer has a transaction history, it should be checked. The transaction details, such as purpose and nature, should be investigated based on their processing times and interested parties.

Transaction history analysis is a crucial step in conducting due diligence. A financial institution should search for information related to the customer's previous transactions, including current ones if available.

This involves looking at aspects such as who the customer did business with, how and why the transaction was carried out, how long the transaction took, and the value of goods and services provided relative to how much was paid for them. Be on the lookout for clusters of crypto transactions made within a short time frame.

Investigate when cryptocurrencies are sent all at once to more Virtual Asset Service Providers (VASPs) than there are parties to the transaction. This could indicate money laundering, especially if the customer is making small payments in an attempt to avoid their activity being flagged as high-value.

Transaction details, such as purpose and nature, should be investigated based on their processing times and interested parties. Companies should ensure that the accuracy of this step meets the expected threshold.

Businesses should regularly scan their customers and write a report paper on their activities using AML compliance software. This helps to create risk factors based on their industry and implement a risk-based approach.

Visiting a business in person is a crucial step in the due diligence process. This allows you to verify the accuracy of the customer's address and description.

Companies that control financial accounts on behalf of others must have physical locations. A financial institution representative can visit these locations to check for a match.

On-site visits are essential for all legal entities. This is because documents that can't be digitally obtained might be physically verified.

A visit can also help you determine if the individual or organization is a risk to do business with. This is because the physical address must match the official address on documents.

Regulated entities must report suspicious activity to their jurisdiction's financial intelligence unit (FIU) through a suspicious activity report (SAR) if CDD measures provide reasonable grounds to suggest a customer's involvement in criminal activity.

The scope of due diligence measures varies on a case-by-case basis in the US, with FinCEN highlighting the importance of regular sanctions screening to ensure customers are not on any global sanctions lists or criminal watchlists.

Companies should also have the capability to efficiently comply with requests for records from regulators, enabling authorities to reconstruct individual transactions, including details such as the amounts of money involved and the types of currency used.

Regulatory bodies such as FATF, EU, Financial Stability Board, OECD, and Basel Committee on Banking Supervision address the need for EDD and AML measures, emphasizing the importance of implementation to avoid legal, reputational, and monetary consequences.

Here are the globally recognized regulatory bodies governing EDD in AML:

AML Requirements are essential for financial institutions to prevent money laundering and other financial crimes. They are mandated by regulatory bodies to ensure that customers are properly identified and their transactions are monitored for suspicious activity.

To comply with AML requirements, financial institutions must implement Know Your Customer (KYC) procedures, which include Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). CDD involves verifying a customer's identity through data comparison and necessary checks, while EDD requires more thorough investigations for high-risk customers.

EDD is necessary for transactions involving Politically Exposed Persons (PEPs), individuals or entities from countries with high-risk designations, and transactions that deviate from normal patterns. It also involves evaluating factors such as geographic location, industry, transaction behavior, and past regulatory issues.

Financial institutions must also have the capability to efficiently comply with requests for records from regulators, enabling authorities to reconstruct individual transactions. CDD regulations typically mandate firms to retain records of the collected information for a minimum of five years.

Here are the key requirements for EDD:

By implementing these requirements, financial institutions can effectively prevent money laundering and other financial crimes, and maintain a strong reputation in the industry.

Tax avoidance and tax evasion are two distinct concepts, and understanding the difference is crucial for businesses and individuals alike.

Tax avoidance is a legitimate practice that involves using legal means to minimize tax liability, such as claiming deductions and credits.

Tax evasion, on the other hand, is a serious offense that involves intentionally concealing or misrepresenting income to avoid paying taxes.

The key to determining the difference between tax avoidance and tax evasion lies in the intentions of the individual or business. If the goal is to follow the law and minimize tax liability, it's tax avoidance. If the goal is to cheat the system, it's tax evasion.

In terms of legality, tax avoidance is generally allowed as long as it's done within the bounds of the law. Tax evasion, however, is a serious crime that can result in fines, penalties, and even imprisonment.

Detection measures for tax evasion include monitoring for suspicious activity, conducting audits, and using advanced data analytics to identify potential cases of tax evasion.

Enhanced due diligence (EDD) is a crucial process for businesses to ensure they're not inadvertently facilitating illicit activities. To effectively implement EDD, the Financial Action Task Force (FATF) recommends several practical steps.

Gathering additional identification information from a broader array of sources is a key aspect of EDD. This can include information from public records, social media, and other non-traditional sources.

Conducting more thorough searches is also essential. This involves digging deeper into the customer's background and business dealings to identify any potential red flags.

Verifying the origins of funds to ensure they are not derived from criminal activities is critical. This includes checking for any suspicious transactions or patterns of behavior.

Obtaining more detailed information from customers regarding the purpose and intended nature of the business relationship is also vital. This can help identify any potential risks or suspicious activity.

Commissioning intelligence reports on customers or their beneficial owners can provide valuable insights into their background and activities. This can help businesses make informed decisions about their business relationships.

To summarize, the FATF-recommended best practices for EDD include:

KYC compliance providers offer automated Enhanced Due Diligence software that can be cloud-based or on-premises, but many solutions are ineffective and difficult to implement.

RegTech solutions can automate Enhanced Due Diligence, strengthening AML programs and proactively safeguarding against financial crime.

At iDenfy, AI-powered identity verification and AML screening can be easily integrated into a simple onboarding process, assessing customers and their risk profiles without adding friction to the KYC flow.

iDenfy's tools for Enhanced Due Diligence include PEPs and sanctions screening, adverse media screening, watchlist screening, and business verification services for corporate clients.

Technology serves as a valuable tool in streamlining EDD processes, but the human touch remains crucial for managing emerging threats.

Sanction Scanner offers a powerful technology-driven approach to Enhanced Due Diligence that can help firms quickly identify high-risk customers and transactions.

Sanction Scanner's advanced risk intelligence algorithms and comprehensive data sources can improve the accuracy of risk assessments and reduce the likelihood of compliance violations.

Sanction Scanner provides various AML/CFT compliance tools, including screening against global sanctions lists and PEPs lists, transaction monitoring, and suspicious activity reporting.

Enhanced due diligence is a critical process in various industries, particularly in high-risk sectors such as finance and energy.

The geography of a business's operations can significantly impact the level of due diligence required. For example, companies operating in regions with high corruption risks, such as Africa or Southeast Asia, may need to conduct more extensive due diligence.

In these regions, it's essential to understand the local business culture and regulatory environment to identify potential risks and opportunities.

Money Services Businesses (MSBs) are naturally at risk of money laundering and terrorist financing activities, making them a prime target for Enhanced Due Diligence measures.

Investment firms must employ customer due diligence to identify suspicious activity, verify customer identities, and fulfill AML regulatory obligations.

Casino and iGaming industries have a history of being exploited for money laundering, which is why they must implement EDD measures to prevent the laundering of illegal funds through gambling activities.

Correspondent Banking is a high-risk area where financial institutions establish relationships with foreign banks, making thorough EDD crucial to prevent money laundering and terrorist financing.

Cryptocurrency exchanges are subject to EDD due to the anonymity and global nature of cryptocurrency transactions, which can facilitate illicit activities.

The following industries are subject to Enhanced Due Diligence:

Geographic Targeting is a crucial aspect of Industry and Geography, and it's essential to understand the risks involved. Jurisdictions with compromised EDD/AML laws are a major concern.

Countries that are on the FATF's grey and black lists are high-risk regions that require extensive scrutiny measures. Business relationships with entities from these areas must be thoroughly vetted.

The FATF's guidelines recommend considering corruption indexes when evaluating the risk of a business relationship. This helps to identify countries with weak anti-money laundering controls.

Unstable political patterns can also be a red flag for geographic targeting. It's essential to assess the political stability of a country before entering into a business relationship.

Corruption indexes and political stability are key factors to consider when implementing Enhanced Due Diligence measures. This ensures that businesses are not inadvertently facilitating money laundering or other illicit activities.

Monitoring and reporting are crucial steps in the enhanced due diligence process. A financial institution should synthesize its findings into a comprehensive report to determine the overall degree and nature of financial risk a customer represents.

This report will be used to decide whether to continue the business relationship with the customer. If the customer is deemed high-risk, the financial institution should create an ongoing monitoring strategy tailored to that customer.

The risk-based monitoring strategy should consider the data and points highlighted in the customer's risk profile report. This will help identify any suspicious patterns in their transactions and changes in their risk profile over time.

Continuous monitoring of high-risk customers takes time, but it's essential to catch changes in risk profiles and detect Anti-Money Laundering (AML) red flags. This can be achieved by using software to alarm businesses based on their customers' profiles or when they make suspicious activity.

Documentation and reporting are crucial steps in monitoring and managing financial risk. Businesses should maintain clear records of the entire EDD process, including trails of reviews and reports on suspicious financial activities.

Collection and maintenance of compliance reports can be achieved by leveraging efficient risk assessment systems. This is essential for staying on top of potential risks and making informed decisions about business relationships.

A financial institution should synthesize its findings into a comprehensive report detailing its appraisal of the customer after completing all necessary steps. This report will help determine the overall degree and nature of financial risk the customer represents.

Businesses can create risk factors based on their industry, such as regularly scanning customers and writing a report paper on their activities using AML compliance software. This proactive approach helps identify potential risks early on.

Clear documentation and reporting processes are necessary for EDD in AML compliance, going beyond just screening and monitoring potential risks.

A risk-based ongoing monitoring plan is crucial for financial institutions to detect and prevent financial crimes. This plan should be tailored to the customer's risk profile report.

High-risk customers require more frequent monitoring, which can be achieved by using software to alarm businesses based on their customers' profiles or suspicious activity.

Continuous monitoring of high-risk customers takes time, so it's best to use a risk-based monitoring strategy. This approach helps businesses proactively catch changes in risk profiles and detect anti-money laundering (AML) red flags.

Ongoing monitoring and periodic reviews allow businesses to maintain clear records of the EDD process and collect trails of reviews and reports on suspicious financial activities. This can be achieved by leveraging efficient risk assessment systems.

Accurately evaluating the customer's risk level is essential for AML compliance, as they might launder money or commit financial crimes through the business. Companies should ensure that the accuracy of this step meets the expected threshold.

If a customer has a transaction history, it should be checked, with the transaction details, such as purpose and nature, investigated based on their processing times and interested parties.