In September 2022, Danske Bank was reprimanded by the Central Bank of Ireland for failures in compliance with anti-money laundering and terrorist financing regulations. Following breaches in transaction monitoring, the bank failed to notify its parent branch, leading to almost 2.5% of transactions going unmonitored and a fine of over €1.2 million. Enhanced due diligence is the leading standard across the US and Europe for preventing money laundering, and enabling compliance. Learn how to perform enhanced due diligence, and meet AML requirements with this compliance guide.
Trustpair aids the enhanced due diligence process through an automated vendor verification and risk assessment tool, offering robust real-time insights. Contact an expert to learn more!
What is enhanced due diligence?
Enhanced due diligence is the completion of an advanced third-party risk assessment on potential customers and business partners to prevent money laundering or terrorist financing. Also known as EDD, the detailed risk assessment is regulated in the financial and legal industries, depending on the nature of the business. It goes beyond the standard Know Your Customer or Ultimate Beneficial Ownership checks to provide a comprehensive picture.
EDD helps to answer questions like:
- Who is this customer or business?
- Who is linked to this customer or business?
- Who ultimately benefits from the financial activities of this customer or business?
- Are there any red flags associated with the:
- customer or people behind this business?
- transactions or partnerships associated with this customer or business?
- location of the customer or business?
- history of the customer or business?
- documentation or records of the customer or business?
By performing enhanced due diligence, companies can be sure that they are not building relationships with money launderers or terrorist financiers. It is one of many internal controls that institutions can implement to prevent fraud.
Enhanced due diligence should reveal any red flags, such as whether there are links to criminal or terrorist groups, and whether transactions indicate money laundering. It’s recommended to be performed on high-risk entities, which has been defined by the FATF and can be found at the end of this piece.
How does the enhanced due diligence process work?
The enhanced due diligence process begins with a culture of risk and monitoring, as recommended by the regulator; the Financial Action Task Force (FATF). By taking this approach, financial institutions can proactively monitor ‘high-risk’ entities or customers before they are allowed to open an account.
Companies must gather the right information about their customers or partner businesses in order to identify them. This should be assessed following information from a variety of external sources, to corroborate identities with confidence.
Additionally, organizations must verify the source of funds held by their customers or partners. In this case, you should be looking for two factors:
- Check that the funds match the origin confirmed by the third party
- Ensure that they are not proceeds of a crime
To apply closer scrutiny, firms should independently verify the nature of all business relationships or the purposes of each transaction. With each verification, investigators should gather comprehensive documentation to provide evidence of findings and meet regulatory compliance requirements.
Ongoing monitoring is key to maintaining an enhanced due diligence status, as this enables a transparent and informative approach to maintaining customer or supplier relationships. Many individuals and companies will know that enhanced due diligence is a standard part of their business relationships, and will be forthcoming with the presentation of their information.
Our checklist to perform enhanced due diligence
- Customer or business information: comprehensive data collection including name, aliases, DOB or business commencement date, nationality or operating jurisdiction, address, and contact details
- Nature of activity: detailed description of the purpose of the business, or the customer’s financial activities, such as type of project and industry
- Source of funds: independently verify where the customer or business funds originated by following the paper trail and verifying any documents with additional checks to ensure they were not profits from crimes
- Beneficial ownership: determine the owner and controller of a business through the UBO register, even where it may be opaque, to identify who ultimately benefits from the financial activities and ensure they are not associated with criminal groups
- Examine transactions: assess the types, frequency, and purpose of transactions including identifying any suspicious or abnormally large transactions for additional investigation
- Location: perform a risk assessment with relevance to the customer’s geographic position, including whether the country is listed on Sanctions or Watchlists lists
- PEPs: identify any politically exposed persons who are at higher risk of money laundering or financial targeting
- Personal sanctions: alongside checking for countrywide sanctions, ensure that the individuals (UBOs) involved are not listed on terrorist watchlists or other databases of a similar nature
- Compliance: verify regulatory and legal compliance to avoid penalties and repercussions on your own business, including AML and CTF in particular
- Reputation review: complete a media screening to assess the public sentiment and uncover any recent or historical issues
- Relationships review: examine existing partnerships to provide additional context or highlight risks that you may have missed
- Ongoing monitoring and record-keeping: establish a method to continuously oversee the customer or business’ financial activities and set up a protocol for record-keeping for compliance, and reporting in case of suspicious behaviour or transactions
Enhanced due diligence vs. standard due diligence: what’s the difference?
Many firms confuse enhanced due diligence (EDD) with simplified due diligence (SDD) and standard customer due diligence (CDD), or believe that they are the same process. However, enhanced due diligence is an extension of customer due diligence, and requires a more in-depth investigation.
| Simplified Due Diligence | Standard Customer Due Diligence | Enhanced Due Diligence |
| Least complex checks for lowest-risk customers or entities | Moderate complexity of checks for moderate-risk customers or entities | Most complex checks for the highest-risk customers or entities |
| Only requires the identification of the customer or entity, verified with third-party data | Requires the collection of customer identification data | Requires all of CDD requirements, plus additional transaction, relationships, and watchlists investigation |
| Requires the classification of customers into a risk rating system to determine the level of ongoing monitoring | Requires investigators to meet ‘reasonable reassurance’ requirements when determining their KYC risk levels | |
| Requires investigators to document their methods of assessment and assess how reliable their information is | ||
| Requires investigators to pay attention to politically exposed persons (PEPs) |
How does enhanced due diligence support AML compliance?
There is a direct correlation between enhanced due diligence and anti-money laundering compliance.
That’s because EDD provides both broader and more complex evidence-based verification of the identity, relationships, transactions, and red flags of any organization or customer. It enables financial institutions to identify information even where it is obscured and enter into a new relationship with their eyes wide open.
Without EDD checks, there is a risk that financial institutions allow those committing or associated with money laundering to open an account. This makes institutions complicit. Once discovered and made public, it can have devastating reputational effects on the institutions, driving away current customers and discouraging new prospects. This can snowball into significant financial damage.
However, those responsible for performing enhanced due diligence must regularly screen the UBO register, watchlists, sanctions lists, and PEP lists as these are ever-evolving, and there is no guarantee that customers or entities will be forthcoming with changes in this information, especially if they are attempting to hide it. That’s why the ongoing monitoring requirement is key to following EDD requirements and supporting AML compliance.
Fortunately, it’s where Trustpair can help. With automated, continuous B2B transaction monitoring, you can let the compliance happen in the background. When suspicious transactions, ID mismatches, or authentication issues occur, Trustpair automatically blocks your business account from making payments to untrustworthy sources.
What industries need this type of due diligence?
Enhanced due diligence is for the following highly regulated industries:
- Financial
- Legal
- Real-estate
- Betting and gaming (including e-gaming and casinos)
In these industries, enhanced due diligence must be performed on high-risk customers or businesses. There are multiple variables that can lead to high-risk classification.
Who are high-risk customers or businesses?
The FATF Recommendation 19 states that Enhanced Due Diligence should be performed “to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF”.
Therefore, when dealing with any customer or business from the following countries, an investigator must also perform enhanced due diligence:
- Albania
- Barbados
- Botswana
- Burkina Faso
- Cambodia
- Cayman Islands
- Democratic People’s Republic of Korea (DPRK)
- Ghana
- Iran
- Jamaica
- Mauritius
- Morocco
- Myanmar
- Nicaragua
- Pakistan
- Panama
- Senegal
- Syria
- Uganda
- Yemen
- Zimbabwe
Entities are also considered high-risk if they meet any of the following criteria:
- Involving politically exposed persons
- Complex or opaque ownership structures
- Cash-intensive businesses
- Anonymous or unusual transactions
- Private banking institutions
Use an EDD checklist to protect your business
Enhanced due diligence (EDD) is the strictest form of customer or business due diligence for regulated entities in finance and law. It requires identification checks, authentication of ownership, and transaction monitoring to ensure that parties are not associated with money laundering or terrorist financing. Upgrade your EDD process by partnering with Trustpair.
