Enhanced Due Diligence: A Deep & Necessary Banking Procedure
Strengthening Financial Services: The Importance of Enhanced Due Diligence (EDD)
In the world of financial services, customer due diligence (CDD) is a standard process for verifying identities, assessing risks, and ensuring regulatory compliance. However, when it comes to high-risk customers, the stakes are higher, and an enhanced due diligence (EDD) approach is necessary.
EDD, a more rigorous form of due diligence, is applied to customers who pose a greater risk of financial crime, such as politically exposed persons (PEPs), customers in high-risk jurisdictions, those involved in correspondent banking, or charities. This enhanced procedure involves additional identification and verification steps, increased monitoring of transactions, more frequent reviews, deeper investigations into customer behavior and financial history, screening for adverse media or sanctions risks, and tighter thresholds for transactions [1][3][5].
For instance, in 2015, Ali Al Duais, the owner of King Mail & Wireless Inc., a money services business in Michigan, was assessed a civil money penalty by the Financial Crimes Enforcement Network (FinCEN) for violating the Bank Secrecy Act by failing to develop an effective anti-money laundering program [6]. This underscores the importance of a robust EDD framework.
Financial institutions must be proactive in implementing EDD programs to assess customer risk, minimise business exposure, and ensure compliance with regulations like the Bank Secrecy Act. A beneficial owner, according to FinCEN, is someone who exercises substantial control over or owns at least 25% of a company [2]. Therefore, identifying and verifying the identity of beneficial owners of legal entities is crucial in lowering potential risks for financial crimes.
A tiered, programmatic workflow approach to vetting customers can help identify and manage risk effectively. Companies should implement KYC tools that periodically review customers throughout the duration of the relationship. Moreover, a robust EDD framework should monitor updates on watchlists, such as sanctions, PEPs, and other watchlists [4].
Consulting with experts can also help banks improve their EDD policies and incorporate multiple KYC checks and balances into their identity-verification process. Automation tools can accelerate and improve the KYC review processes, making them more efficient and effective [3].
Lastly, banks should continuously reevaluate customer risk as part of their EDD frameworks. The appearance of a beneficial owner in adverse media reports can trigger additional EDD protocols. Suspicious activity or transactions, like large payments with no apparent business or lawful purpose, can indicate a need for further EDD. A robust EDD framework helps financial institutions comply with regulations enacted to help with risk management, fighting money laundering, and stopping terrorist financing [1][4].
In conclusion, EDD for financial services goes beyond identifying and verifying potential business customers; it builds a risk-based framework around know your customer (KYC) practices. This enhanced due diligence is crucial in ensuring the safety and integrity of the financial system.
References:
- https://www.fca.org.uk/publication/policy/ps17-08.pdf
- https://www.fincen.gov/about/resources/guidance/beneficial-ownership-customer-due-diligence-requirements-financial-institutions
- https://www.pwc.com/gx/en/services/risk-assurance/financial-services/regulatory-risk-management/anti-money-laundering-anti-bribery-and-corruption-regulatory-risk-services.html
- https://www.fincen.gov/news/news-releases/fincen-issues-advisory-reminding-financial-institutions-importance-enhanced-due
- https://www.fca.org.uk/publication/policy/ps12-15.pdf
- https://www.fincen.gov/news/news-releases/fincen-assesses-civil-money-penalty-against-king-mail-and-wireless-inc-for-violating
- With a robust Enhanced Due Diligence (EDD) approach, financial institutions can effectively manage the risks associated with personal-finance matters, business investments, and wealth-management activities, ensuring compliance with regulations like the Bank Secrecy Act.
- In the context of wealth-management and personal-finance, EDD not only verifies the identities of customers but also builds a risk-based framework around know your customer (KYC) practices, playing a crucial role in safeguarding the integrity of the financial system and combating financial crime.
