Enhanced Due Diligence (EDD)

To put it simply, enhanced due diligence is a more in-depth process of KYC and AML, which is designed to detect risks regarding potential business partnerships that can’t be uncovered through simple means, such as standard due diligence. 

The additional EDD measures are intended to oversee and monitor high-risk or high-net-worth customers, along with their high-volume transactions, due to the elevated risks associated with these individuals and their financial activities.

The difference between SDD, CDD, and EDD lies in their range of measures. During the customer onboarding process, financial institutions conduct checks to detect potential financial crime. 

These checks align with a risk-based approach and can include simplified due diligence (SDD), customer due diligence (CDD), and enhanced due diligence (EDD) based on varying levels of scrutiny:

• SDD is the lowest level of due diligence and is designed for low-risk cases, emphasizing basic checks to mitigate money laundering and terrorism risks.
• CDD is applied to moderate risks, often reserved for customers that carry a low or medium money laundering risk.
• EDD is the highest level, which is applied for high-risk scenarios, entailing rigorous investigations and a broader focus on risk mitigation, including combating money laundering and terrorism financing.

For both individual and corporate clients with high-risk factors, additional due diligence is necessary. After high-risk factors are identified, such as if a client is a Politically Exposed Person (PEP), companies apply EDD measures to assess and document potential risks. For example:

• Using internal and external independent sources of data to conduct extensive research on the client’s identity and nature.
• Verifying the source of funds or wealth.
• Identifying the risk posed by the client, understanding it better, and assessing how or if it can be mitigated.
• Enforcing continuous monitoring procedures.

Cases where performing EDD is always mandatory include if the customer:

• Appears on a sanctions list or watchlist. 
• Resides in a high-risk country.
• Is identified as an ultimate beneficial owner (UBO).
• Has a documented history of money laundering and related financial crimes.
• Is a PEP (including if they are associated with a PEP as a family member or associate).
• Engages in unusual new business activities.
• Displays unusual transaction patterns. 

It’s crucial for obliged entities to conduct EDD and assess the changes that occur in the customer’s profile. So, EDD isn’t a one-and-done process, it’s rather an ongoing practice to maintain compliance and detect various risk factors that occur over time.