As the world evolves into an era where financial crimes and illegal activities are becoming common, businesses should carefully monitor the identities of customers they regularly deal with. Organizations should adopt strategies where they can identify and prevent any risks associated with potential clients because high-risk clients can involve more significant financial risk. Businesses must verify the identities of their stakeholders through a framework that identifies the presence of high-risk clients.
Enhanced due diligence (EDD) compliance is an efficient way to deal with high-risk customers and ensure their legitimacy. EDD is a process of collecting data about the client’s reputation, risk profile, and history. It is crucial for businesses to identify potential risks of money laundering and terrorist financing. EDD is a KYC verification method used to authenticate high-risk customers classified by the KYC risk rating process.
When is EDD Compliance Triggered?
Various malicious activities can trigger the need for enhanced due diligence methods. Some of these triggers are:
- High-Risk Customers
High-risk customers can harm business operations by being involved in fraudulent activities. They could also pose high money laundering, account takeover, and default risks. Companies can categorize high-risk customers based on their previous occupation or involvement in suspicious activities.
- High-Risk Industries
Several industries are suspected of being involved in illegal activities requiring enhanced due diligence. Industries such as money service businesses and cryptocurrency exchanges are prone to be involved in terrorist financing and money laundering activities.
- Unexpected Transactions
Enhanced due diligence is required when large transactions are made in very little time, money is frequently transferred internationally, or when multiple cheques are deposited in a single bank account.
- Politically Exposed Persons (PEPs)
A politically exposed person is someone who is closely related to some government officials. Such a person can pose a higher risk of involvement in corruption, bribery, and illegal financial acts. The presence of these people increases the need for EDD compliance within the company.
- Sanctioned Identities
A customer with a sanctioned identity is someone listed on domestic and international sanction lists. They can be involved in illegal activities which can trigger the need for EDD. Companies should comply with enhanced due diligence to investigate such entities and limit their access to the company’s data.
Execution of Enhanced Due Diligence Process
The enhanced due diligence process should be an inherent part of companies working with high-profile companies and customers. An effective EDD process should follow the given checklist:
- Use of a Risk-Based Approach
A risk-based approach is used to classify customers into various risk categories. This helps detect the presence of high-profile customers. It is crucial to evaluate the customer’s risk level to comply with the company’s anti-money laundering guidelines. Companies should comply with enhanced due diligence AML guidelines to prevent any financial crime throughout the business.
- Generate an EDD Checklist
In this step, a checklist is created for the high-risk customers so that the companies can comply with Know Your Customer and Anti-money laundering policies. This checklist contains all the vital information about the clients and customers with whom the company is dealing with.
- Analyzing the Ultimate Beneficial Ownership (UBO) of Funds
It is crucial for companies to know whether the customer’s wealth is coming from legitimate sources or not. Companies have to ensure they verify the customer’s financial and non-financial assets. Variability in the customer’s wealth and net income should be appropriately investigated using the EDD process. The company owners must be authenticated while monitoring the company’s UBO.
- Tracing the Ongoing Transactions
This step monitors the customer’s transaction history. Transaction duration, nature, and purpose of transactions are investigated to ensure the accuracy of ongoing transactions.
- Analyze Customers and Business Profiles
Companies should read customer’s details and analyze their reputation completely. Any adverse finding would suggest that the potential customer could threaten the business operation in the future. EDD checks can also monitor the reputation of businesses by reviewing data available on news and social media platforms.
- On-Site Visits
In this step, on-site visits to the addresses are conducted to verify the remaining documents that could not be digitally verified. In fact, it is essential to visit the business location before performing the operations to prevent risky events.
- Write a Final Report
Companies should scan their customers regularly and write a final report to keep track of all their activities by using software that complies with the AML guidelines. Then, the companies can figure out all the risk factors involved in the customer’s identities and use EDD services to overcome them.
Summing It Up
Enhanced due diligence (EDD) is beneficial in tracking and mitigating the transactions conducted by high-risk customers. It ensures the credibility of the business by making it more secure. The enhanced due diligence compliance can enhance the overall customer experience by improving the company’s reputation. This feature can prevent all financial crimes from reaching the business’s boundary.
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