Did you know that almost $2 trillion is lost in money laundering? This makes up 2-3% of the global GDP! (Deloitte)
To tackle this rising problem in the finance sector, authorities have pressured banks and other Fintech institutions to integrate EDD Compliance in their systems!
Read what it is and how it helps businesses against money laundering and identity theft!
What Is Enhanced Due Diligence?
It is a process based on KYC and AML-compliant laws to establish identities of high-risk profiles or suspicious transactions.
EDD is the last layer in customer due diligence. There are 3 categories and in ascending order, the risk score of a customer increases along with identity verification.
- Simple Due Diligence (Low-Risk)
- Customer Due Diligence (Standard)
- Enhanced Due Diligence (High Risk)
In other words, it is a precautionary regulation that comprises various tools, methodologies, and rules to authenticate a customer. Firms utilize this as a way to counter-creating business relationships with cybercriminals or suspicious organizations. It is an in-depth investigation with more background checks than a standard CDD.
Better safe than sorry (avoiding millions of dollars lost due to fines and penalties for being non-compliant)
Now let’s dive into when EDD compliance is required and how it is executed in relevance in Fintech!
When does EDD become a requirement?
FATF (Financial Action Task Force) is an organization that fights against money laundering and terrorist financing as a watchdog. It has been emphasizing a risk-based approach for onboarding customers (which will be dealt with in depth later in this article). With the demand for rigid regulations and strict legislation, EDD is becoming a necessary process for digital banks. The question is, “When does it become a requirement?”
- If a customer belongs to a high-risk location, this may include the risk score of the country they live in.
- Business relationship or purpose is ambiguous.
- When AI detects an inconsistency in the data provided.
- When transactions of a business are intensively based on cash exchanges.
- Have a history of suspicious activities.
- Transactions that involve anonymous third parties.
- A company that has a previous record of being involved with terrorist groups.
- Might be found in a sanction list of another country.
Even one of these reasons is enough for an enterprise to do hefty investigations into the company.
How is EDD Compliance Different From CDD?
There are differences in the operation of EDD compliance and CDD processes. Some of these are categorized below:
EDD CDD
| Detailed Documentation
EDD involves gathering an extensive list of documents along with basic documents like ID cards. This may include years of bank statements, tax payments, qualifications, property ownership documents, and income evidence. |
Basic Documents Required
In CDD since the customer is low-risk, the documents are limited. This may include an ID card, license, and bank statement. |
| Time-Consuming
Since it requires a more detailed investigation, the process of verification demands long periods. |
Instant Verification
Most of the authentication steps are automated so CDD is an instant process of verifying a customer. |
| Monitoring Activities Intensively
It requires vigorous geo-locating and address verification. |
Low-Effort Monitoring
This consists of validating the address mentioned to a database automatically. |
| Is Expensive
The policies and regulations are robust which makes them expensive to carry out. |
Is Cheaper Than EDD
Most of the identity assurance is automatic, which makes it a cheaper option. |
Ways EDD Banking Is Put Into Effect (Execution)
There are several requirements in the basic checklist of EDD. Some steps might differ from country to country. However, FTAF has been focusing on promoting a stricter and standardized execution procedure. This is how it is typically applied in EDD banking:
1.Risk-based approach
Classification of companies or profiles based on their risk score. If they are filtered as high-risk then EDD should be done thoroughly based on AML regulations.
2.Evaluating UBO funds
UBO (Ultimate Useful Ownership) refers to tracking the origin of a customer’s wealth. Banks are aware that their assets depend on the financial assets of the customers. Therefore, doing a background check of all sources of income is integral for a legitimacy check.
3.Analyzing Adverse Media
Involves checking the reputation of that company in papers, news, and media.
4.On-site visitation
Business relationships built without face-to-face interaction are susceptible to more financial crimes. Therefore, it is vital to send a team member to visit the site of the firm.
5.Transaction Tracking
Consists of analyzing bank statements, transaction beneficiaries, and spending behavior.
6.Monitoring
Monitoring the activities is a great chunk of EDD banking.
What Is a Risk-Based Approach In Enhanced Due DIligence AML?
In Enhanced Due Diligence AML the first step to classifying a customer as a potential threat is by approaching the risk-based approach. It filters out the company after doing vigorous background checks and tracking.
How Shufti Pro Is A Game Changer In KYC Online Verification?
Shufti Pro is a fully automated AI company with all the authentication services a bank might need. It is strictly based on Kyc and Aml mandates. Moreover, its top-notch tools of KYC online verification have helped earn a reputable place among the top best verification companies. Established in 2017, it has been successfully serving businesses with EDD Compliance for a safer future.
