How to conduct Enhanced Due Diligence (EDD)

17/07/2024

Enhanced Due Diligence (EDD) is reserved for managing higher-risk clients and transactions. It involves a more rigorous investigation compared to Standard Due Diligence to ensure that firms have a full understanding of who their client is and the risks they present before working with them.

Here’s a list of key actions on how to conduct EDD effectively:

Identify High-Risk Clients and Transactions

The first step in EDD is identifying clients and transactions that pose a higher risk to your firm. This can include politically exposed persons (PEPs), clients from high-risk jurisdictions, or transactions involving large sums of money.

Key Actions:

  • Use risk assessments to categorise clients and transactions based on risk levels.
  • Identify high-risk indicators such as the client’s background, geographic location, and nature of the transaction.
  • Continuously monitor for red flags that may indicate higher risks.

Collect Detailed Information

Gathering detailed information about the high-risk client or transaction is essential to identify and manage potential risks. This includes obtaining more documentation and conducting in-depth verification on the client.

Key Actions:

  • Collect additional identification documents and verify their authenticity.
  • Obtain detailed information on the client’s source of wealth and funds.
  • Request and review supporting documents such as financial statements, contracts, and business plans.

Conduct Thorough Background Checks

Perform extensive background checks to uncover any adverse information about the client. This involves checking multiple sources and databases.

Key Actions:

  • Use trusted international databases to screen for sanctions, adverse media, and PEPs.
  • Conduct open-source searches to find news articles, social media posts, and other public information.
  • Verify the client’s business activities and reputation within their industry.

Assess Source of Funds and Wealth

Understanding the origin of the client's funds and wealth is critical in EDD. This helps in identifying any suspicious or illicit sources.

Key Actions:

  • Request detailed explanations and documentation of the client’s source of funds.
  • Verify the legitimacy of the sources through third-party verification when possible.
  • Cross-check the information with financial institutions and other reliable sources.

Enhanced Monitoring and Ongoing Due Diligence

EDD is not a one-time process; when high-risk clients are identified, they require continuous and frequent monitoring to detect any changes in the client’s risk profile to identify suspicious activities.

Key Actions:

  • Implement real-time transaction monitoring systems to flag unusual activities.
  • Schedule regular reviews and updates of the client’s information.
  • Use automated alerts to stay informed of any new risks or changes.

Involve Senior Management

Due to the higher risks involved, it is important to involve senior management in the decision-making process for the additional sign-off. This ensures that all significant risks are properly evaluated and managed.

Key Actions:

  • Require senior management approval for onboarding high-risk clients or executing high-risk transactions.
  • Provide detailed reports to senior management outlining the risks and mitigation measures.
  • Ensure that senior management is informed of any significant changes or findings.

Maintain Detailed Records

Proper documentation is essential for demonstrating compliance with regulatory requirements and providing an audit trail when audits are conducted.

Key Actions:

  • Maintain comprehensive records of all EDD activities, including the information collected, verification processes, and risk assessments.
  • Document the rationale for any decisions made regarding high-risk clients and transactions.
  • Ensure that records are easily accessible for audits and regulatory inspections.

Summary

Enhanced Due Diligence is a critical component of any robust AML compliance program. Identifying high-risk clients and transactions, help protect your firm against fraud whilst mitigating the risks associated when representing high-risk clients. Using technology solutions like Validient can help with risk management in a more effective manner and provide an overview of EDD activity.

Following these steps can help you to manage your risks so you can focus on providing great service.

To see how Validient can help your firm with AML compliance, client onboarding, and risk management, visit our website.

Thanks for reading!


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