Business partnerships always have risks that demand the utilization of smart digital solutions. All financial institutions have an obligation to abide by AML/CFT regulations to implement Customer Due Diligence (CDD). Based on the risk profile of a potential customer, all firms must follow the due diligence process that empowers them to fight money laundering and terrorist financing cases.
For the purpose of determining whether new customers are genuine or not, the CDD procedure is compulsory. It is about verifying the customer’s identity. Nonetheless, in the case of high-risk entities, another in-depth procedure plays an important role (i.e., Enhanced Due Diligence).
Understanding The Need for Enhanced Due Diligence Procedure
EDD is an advanced method to combat the risk of financial crime in the world. The upgraded procedure has a complex mechanism to perform in-depth background checks on new clients. If a potential customer has a high-risk profile, Enhanced Due Diligence can validate their presence in global sanction lists in real time. Keeping in mind the KYC & AML requirements from international regulators, legislators are making them more stringent with the passage of time. In this scenario, all businesses must rely on robust EDD for fraud prevention.
Enhanced due diligence normally has a collection of checks that helps deter high-risk entities. Such types of parties participate in money laundering and terrorism financing cases. The process requires in-depth and confidential data from customers. In the case of business parties, the system asks the owners for complete information regarding their Ultimate Beneficial Owners (UBOs).
Comparing EDD & CDD Procedures
Contingent upon the risk assessment measures, the requirement for due diligence varies. In order to identify a high-risk entity, all new clients must go through the customer due diligence phase. After identity verification, consumers can receive low, medium, or high-risk scores. After the initiation of the Enhanced Due Diligence (EDD) procedure, all customer details must be verified. For instance, the data includes a source of funds, reasons behind their transactions, and genuine records from financial firms.
Utilization of the Enhanced Due Diligence (EDD) procedure demands additional data from consumers, such as banking details and data about old bank accounts. In the case of enterprises, it demands information about all the Ultimate Beneficial Owners (UBOs). Companies that implement smart risk assessment measures can easily evaluate when to perform Enhanced Due Diligence (EDD).
In addition, the system checks for the presence of onboarding customers on Politically Exposed Persons (PEPs) lists. In this case, the system cross-checks all relevant entities in the PEP lists. If a customer is a wealthy entity, Enhanced Due Diligence can find their involvement in money laundering and terrorism financing cases. Clients and enterprises that deal in arms trade or gambling sectors are an obvious red flag. The reason behind this is that they constantly look for possibilities to launder money.
Comprehending The Significance of Enhanced Due Diligence (EDD) Procedure
There are cases when businesses & financial institutions cannot identify high-risk parties. In this case, all new customers must go through the EDD procedure, even for smaller indicators of risk. To rephrase, the utilization of Enhanced Due Diligence (EDD) becomes necessary to deal with money laundering cases promptly.
The U.S.A. Securities and Exchange Commission issued an order that held Credit Suisse Group AG responsible for their participation in the fraud. In this scenario, the group violated AML protocols. As per Bloomberg, Credit Suisse had to pay a total of $475 million to the SEC as compensation.
Recognizing the Risk Factors for Financial Firms
As a precautionary measure, all corporations must evaluate the risks linked with every new customer. Experts must report high-risk entities in case they come upon fraudulent transactions. Normally, there are major 3 kinds of risk factors:
- Arising from the customer’s side
- Coming from areas/ jurisdictions
- Emerging from products & services
Consumer risk indicators comprise cash-oriented businesses, connections to PEPs, and foreign clients. Likewise, geographical risk factors come up when the organization or party is based in a location that is highly risky.
Products & services contain risks associated with terms and conditions & exchanges that are associated with fraudulent activities. All businesses must evaluate risks regarding the transparency of services being offered. In case a transaction is linked with various parties from multiple jurisdictions, executing Enhanced Due Diligence (EDD) is extremely important.
Final Thoughts
Enhanced due diligence plays an important role in dealing with high-risk entities and financial fraud. The process demands in-depth details of the transaction to guarantee accurate validation. Enhanced Due Diligence (EDD) has several benefits other than real-time ID verification checks. It enhances a business’s credibility and attracts genuine partners for collaboration.
Collaborating with a third-party service provider that offers KYC/AML screening solutions for timely verification of high-risk clients. Hence, the cutting-edge solution guarantees a competitive edge in a tough market atmosphere.