Around $2 trillion of illicit cash flows each year through the global financial system despite the efforts of regulators and financial institutions. To combat dirty money, enhanced due diligence (EDD) is a process that requires a thorough Know Your Client (KYC) that examines the customer’s history and transactions that have higher fraud risks.
EDD is regarded as having a higher screening level than CDD and can also include more information requests such as sources and funds, corporate appointments and connections with individuals or companies. It typically involves more thorough background checks, including media searches, to determine if there is any publicly accessible evidence or reputational evidence of misconduct or criminal activity that could threaten the bank’s operations.
Regulatory bodies set enhanced due diligence in banking sector analysis out guidelines on when EDD should be activated, and this is usually based on the nature of the transaction or customer and whether the person in question is a politically exposed individual (PEP). But ultimately, it’s up to each FI to make a purely subjective judgment on what triggers EDD on top of CDD.
It is important to have policies that clearly inform employees what EDD expects and what it is not. This will allow you to avoid situations that are high-risk and could cause hefty fines due to fraud. It’s also vital to have a thorough process for identity verification that can help you spot red flags like hidden IP addresses, spoofing technologies and fake identities.