If service/product and customer combination is found to be at greater risk, then there is a requirement for Enhanced Due Diligence (EDD). It will be necessary at a higher level to mitigate increased risk. Generally, there occurs a high-risk situation if an increased opportunity is experienced due to terrorist financing or money laundering through products and services provided by the organization or customer.
What is entailed by EDD will be dependent upon the severity and nature of risk. Enhanced due diligence may occur in several forms, ranging from a collection of additional information to the source of income, verify customer identity or adverse media check. Checks made need to be proportionate or relative to identified risk level and ensure confidence to mitigate risks.
Several situations may pose a high risk, like whether the customer has not been met face to face or dealt with a politically exposed person. But the high-risk client does not necessarily mean being involved in any criminal activity or money laundering, but of increased involvement opportunities.
Factors associated with EDD
Customer risk factors
Legal persons being personal asset holding vehicles.
The bulk of clients being non-residents or foreigners.
If the customer is PEP (Politically Exposed Person), their known associates or family members.
Cash incentive businesses.
The presence of nominee shares or shareholders in the company’s bearer form
Every company’s including local regulations’ AML policies is what regulates risk level. Certain limits are present to the daily cash transaction amount.
Geographical risk factors:
Countries currently under embargoes and sanctions or facing similar measures.
Trusted sources have identified countries not having adequate CFT/AML systems.
Countries that are stated to be notorious for prevalent corruption levels as noticed by credible sources.
Countries not being FATF or its partners’ members.
Locations with designated operations within the country.
Countries that are blacklisted to support or finance terrorist activities.
Other risk factors:
o Correspondent and private banking. Such banks do maintain a very high confidentiality level and are revenue-driven. Therefore, they are found to be naturally prone to money laundering.
How EDD is to be conducted: Valuable Guidelines
To ensure correct EDD, the following steps are recommended:
- Take risk-based approach: It provides clear knowledge of the presence of high-risk clients in the business, including other cases that merit high-risk status. It is important to judge the customer risk level accurately to take this particular approach. The other is to establish duration for Due Diligence procedure. Such factors are to be reflected within the AML compliance policy.
- Obtain extra identifying information: Questionnaire to suit risk-based policies to be provided to high-risk customers. It should offer an in-depth and basic question about the customer. Additional information is to be gathered from third parties and customers.
- Analyze the source of Wealth/Funds & UBO (Ultimate Beneficial Ownership): It helps to better understand customer’s wealth, its legitimacy, and its origin.
- Gather basic details about corporate structure and history.
Value both public and private companies by searching systematically business articles and company filings for shareholding and financial data.
Standard documents to confirm property sale, salary, inheritance, etc.
Highlight discrepancies found between overall net worth, source of wealth and income.
- Ongoing Transactions Monitoring: Find out transactional details like nature, purpose, and background. Additional details like transaction duration, involved parties, etc. not to be overlooked. For the crypto transactions, understand its history and nature. Ensure transactions match with the stated purpose and they are in expected or usual threshold.
- Negative Check & Adverse Media: Relevant press articles need to be reviewed thoroughly and relevant information to be analyzed to create a customer’s complete profile and reputation. But if there is found overwhelming negative results, then the customer can be risky for the business.
- Conduct On-site Visit: All legal entities, such as companies and banks are to conduct an on-site visit to a physical address. If digital documents are not provided, then it should be done physically. Risk-based threshold gets breached, in case, the physical address is not found to correspond with that of the address mentioned within the official documents.
- Draft report to ensure further review: When considering previous EDD steps are taken and its success, make an onboarding decision. Score based ranking system is to be created, and onboarding of high scores encouraged. Due Diligence report is to be compiled for future and internal regulatory reviews. EDD report with information obtained can be stored on a secure server and should be accessible to regulators. Digital processing & storing of client’s personal data according to GDPR (General Data Protection Regulation) is to be done.
- Create consistent Risk-based monitoring strategy: Monitoring consistently high-risk customers do require plenty of effort and are time-consuming. Hence, it will be wise to implement a risk-based monitoring strategy.
Therefore, getting to know about EDD and the different steps to follow and putting the same into practice can help to ensure high-risk clients do not pose an issue to the business.