EDD: Screening High-Risk Clients with Precision

Enhanced Due Diligence (EDD) refers to advanced scrutiny and risk assessment procedures undertaken by financial institutions and corporate entities to mitigate risks associated with high-risk customers, transactions, or jurisdictions. It goes beyond Customer Due Diligence (CDD) to provide deeper insights, thereby ensuring compliance with anti-money laundering (AML), Know Your Customer (KYC), and global regulatory guidelines.

Key Differences: CDD vs. EDD

• Customer Due Diligence (CDD): Simplified verification for low-risk individuals or businesses, such as ID checks and address validations.
• Enhanced Due Diligence (EDD): Reserved for high-risk cases, requiring comprehensive investigations such as identifying the source of wealth, analysing adverse media, and conducting ongoing monitoring.

For example, while CDD might verify a basic retail customer, EDD would apply to a politically exposed person (PEP) with international business dealings.

Why Is EDD Essential?

EDD is critical in identifying and mitigating risks such as:

• Money laundering through offshore accounts.
• Financing of terrorist organisations via complex ownership structures.
• Reputational risks to financial institutions from non-compliance.

LSEG Risk Intelligence solutions help ensure compliance through advanced features, including screening adverse media and monitoring high-risk profiles.

Identification and Mitigation of Risks

EDD helps to uncover hidden financial crime risks through the additional collection of information, such as clarifying unexplained wealth or relationships with high-risk entities.

Strengthening AML, KYC, and FATF Compliance

EDD advances KYC processes mandated by regulatory frameworks like FATF (Financial Action Task Force), thereby ensuring higher compliance standards.

Protecting Financial Institutions

Failure in EDD can result in severe consequences, including hefty fines, reputational damage, and loss of customer trust. For instance, a major European bank was fined heavily for inadequate EDD procedures linked to high-risk accounts.

1. High-Risk Customers

EDD is triggered for individuals or entities with elevated risks, such as:

• Politically Exposed Persons (PEPs): Public officials potentially exposed to corruption risks.
• Offshore Accounts: Typically affiliated with opaque ownership structures.
• Corporate Vehicles: Entities with complex beneficial ownership.

2. High-Risk Jurisdictions

EDD is mandatory for transactions or clients from regions with weak AML controls, like countries on the FATF greylist.

3. Suspicious Behaviour or Adverse Media

Flags, such as sudden large transactions, unusual activity, or media reports linking an individual to financial crimes, often necessitate EDD.

1. Additional Data Collection

Data that needs to be acquired during EDD includes:

• Source of Wealth and Funds: Ensures funds are derived from legitimate activities.
• Business History: Analyses prior transactions and affiliations.

2. Deep-Dive Background Checks

Detailed investigations for:

• Sanctioned Individuals or Entities.
• Adverse Media Coverage.
• Politically Exposed Persons (PEPs): Reviewed for corruption risks.

3. Ongoing Monitoring

EDD requires dynamic monitoring of accounts and transactions to catch emerging risks.

4. Compliance Team Involvement

Exceptional cases may escalate to compliance officers for manual review and decision-making.

1. Additional Data Collection

Data that needs to be acquired during EDD includes:

• Source of Wealth and Funds: Ensures funds are derived from legitimate activities.
• Business History: Analyses prior transactions and affiliations.

2. Deep-Dive Background Checks

Detailed investigations for:

• Sanctioned Individuals or Entities.
• Adverse Media Coverage.
• Politically Exposed Persons (PEPs): Reviewed for corruption risks.

3. Ongoing Monitoring

EDD requires dynamic monitoring of accounts and transactions to catch emerging risks.

4. Compliance Team Involvement

Exceptional cases may escalate to compliance officers for manual review and decision-making.

1. FATF Recommendations

EDD aligns with FATF standards for AML and combating the funding of terrorism.

2. USA Patriot Act

Mandates stricter due diligence standards for high-risk profiles in US financial institutions.

3. EU AML Directives

Enforces regulations for banks within the EU, requiring enhanced due diligence on PEPs and high-risk jurisdictions.

Role in Onboarding Clients

EDD is essential for onboarding clients with higher risk, such as investors using shell companies.

Preventing Money Laundering

By identifying the real sources of money, EDD prevents laundering through methods like trade-based laundering or casino activities.

Financial Case Example

• An offshore company with vague ownership details and unusually high-value transfers would trigger EDD. In such cases, verifying the source of funds proves crucial in preventing financial crimes.
  

1. Data Reliability Issues

Collecting complete and accurate information across jurisdictions can be difficult, especially for offshore entities.

2. Cross-Border Challenges

Conflicting regulatory requirements obstruct smooth information exchange.

3. Balancing Compliance and Customer Experience

While meeting compliance, excessively rigorous EDD may alienate legitimate customers.

AI-Driven Monitoring

Artificial Intelligence (AI) aids in:

• Adverse media screening.
• Transaction anomaly detection.

Biometric Authentication and e-KYC

Using biometric tech, financial institutions can streamline customer verification, ensuring EDD is conducted seamlessly.

Integration with RegTech Solutions

LSEG Risk Intelligence solutions help institutions improve EDD by leveraging advanced data aggregation tools for real-time screening and account monitoring.

1. Enhanced Identification Documentation: Verifying beneficial owners of complex entities.
2. Third-Party Screening: Using trusted databases or third-party services to identify red flags.
3. Auto-Adverse Media Scans: Staying updated on news related to high-risk customers and entities.