When do I need Enhanced Due Diligence?

An Enhanced Due Diligence report is typically required when conducting business with higher risks or specific triggering events. Understanding when to implement EDD is crucial for companies and financial institutions to maintain compliance and mitigate potential risks. Key considerations for determining when Enhanced Due Diligence is necessary:

Additionally, considering key factors such as the nature of business activities and organisational risk tolerance helps determine when Enhanced Due Diligence is necessary to safeguard against potential risks and maintain regulatory compliance.

1. Identifying Trigger Events Requiring EDD Implementation:

• High-Risk Customers: Enhanced Due Diligence is essential for customers or entities classified as high-risk due to factors like complex ownership structures, political exposure, or involvement in industries prone to money laundering or financial crime.
• Unusual or Large Transactions: When transactions are unusually large, frequent, or exhibit patterns deviating from the norm, it may trigger the need for Enhanced Due Diligence to ensure the legitimacy of the funds involved.
• Change in Customer Behaviour: Significant changes in a customer’s financial behaviour, such as sudden increases in transaction volumes or unfamiliar types of transactions, may necessitate EDD.
• Geographic Risk: Transactions involving countries or regions with higher risks of financial crime, economic instability, or regulatory non-compliance may warrant EDD.

2. Regulatory Mandates for EDD in Specific Industries:

• Financial Institutions: Many jurisdictions, under anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, require financial institutions to perform EDD on higher-risk customers. This may include banks, credit unions, and other regulated financial entities.
• Legal and Accounting Firms: These entities may need to implement EDD, especially if they handle financial transactions for clients or provide services in areas prone to higher risks.
• Real Estate and Property Transactions: In certain jurisdictions, real estate professionals are mandated to conduct EDD, particularly for high-value transactions, to mitigate the risk of money laundering through property.

3. Key Considerations for Determining EDD Necessity:

• Nature of Business Activities: Businesses operating in industries vulnerable to financial crimes, such as casinos, precious metal dealers, and money service businesses, are often subject to EDD requirements.
• Politically Exposed Persons (PEPs): Transactions involving PEPs, or their close associates, may require EDD due to the potentially higher risks associated with politically exposed individuals.
• Legal and Regulatory Environment: The legal framework of the jurisdiction in which the business operates plays a significant role. Regulations may stipulate specific circumstances that necessitate EDD.
• Organisational Risk Tolerance: Each organisation may have its own risk tolerance level. Some may choose to apply EDD more broadly, while others may reserve it for cases with the highest perceived risk of harm.
• Periodic Review of Customer Profiles: Regular reviews of customer profiles can trigger the need for EDD if changes or activities arise that raise concerns.

FAQs on Enhanced Due Diligence

1. What are Enhanced Due Diligence (EDD) Checks?

• Enhanced Due Diligence (EDD) checks refer to advanced and comprehensive procedures conducted by businesses and financial institutions to assess higher-risk customers or transactions. They go beyond standard due diligence to ensure compliance with regulations and mitigate potential risks.

2. What is an Enhanced Due Diligence?

• Enhanced Due Diligence is a structured document outlining specific steps and information required for a thorough assessment of higher-risk customers or transactions

3. How does EDD relate to Anti-Money Laundering (AML)?

• Enhanced Due Diligence (EDD) is a critical component of Anti-Money Laundering (AML) efforts. It involves conducting in-depth assessments of higher-risk customers or transactions to identify and mitigate potential risks associated with money laundering and other financial crimes.

4. What should be included in an Enhanced Due Diligence Checklist for AML purposes?

• An Enhanced Due Diligence checklist for Anti-Money Laundering (AML) purposes should include steps such as customer verification, source of funds verification, beneficial ownership assessment, transaction monitoring, PEP screening, risk assessment, and documentation of findings.

5. When is Enhanced Customer Due Diligence (CDD) necessary?

• Enhanced Customer Due Diligence (CDD) is necessary in situations involving higher risks, such as dealing with politically exposed persons (PEPs), clients with criminal ties, cash-intensive businesses, online platforms with non-face-to-face interactions, businesses in high-risk countries, private banking clients, unexplained business relationships, and complex business structures. It helps ensure thorough assessments and compliance with regulations.

6. How does an Enhanced Due Diligence Checklist differ from standard Due Diligence procedures?

• An Enhanced Due Diligence checklist goes beyond standard due diligence by focusing on higher-risk customers or transactions. It involves more detailed and comprehensive assessments to identify and mitigate potential risks associated with money laundering, financial crimes, and other illicit activities.

7. When should an Enhanced Due Diligence Checklist be used?

• Enhanced Due Diligence should be used in situations where a higher level of risk is involved, such as dealing with customers or transactions that have complex structures, substantial financial transactions, or associations with higher-risk jurisdictions. It ensures that thorough due diligence measures are applied to mitigate potential risks and ensure regulatory compliance.

8. How does EDD relate to Anti-Bribery and Corruption (ABC)?

• Enhanced due diligence is a critical component of an anti-bribery and corruption (ABC) compliance programme. It involves conducting in-depth due diligence checks on higher-risk third-party relationships, such as suppliers, distributors, agents, and intermediaries, to ensure that the company will not be exposed to bribery and corruption risks through its business partners. Enhanced due diligence is a critical component of any Know Your Supplier (KYS) and Third-Party Risk Management (TPRM) programme.

9. How does EDD relate to managing ESG risks such as Modern Slavery laws?

• As laws and regulations increase in Environmental, Social and Governance (ESG) risk, such as modern slavery, human rights abuse, conflict minerals, greenwashing, environmental and wildlife crime, enhanced due diligence (EDD) checks are required to ensure no exposure to such risks in its supply chain or other third parties. 

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