In today's business regime, financial institutes not only focus on profit but also have to secure organizations from various financial crimes. The convenient technique to assure the integrity of financial institutes such as banks, insurance, fintech, etc., is to verify the business and customer they are working with. This will assist them in complying with Financial Action Task Force (FATF) standards. Financial institutions can also follow enhanced due diligence (EDD) measures for high-risk scrutiny. It will highlight the risks that can not be detected by normal customer due diligence (CDD) and secure the organizations from money laundering and terrorist financing.
In simple words, EDD is the anti-money laundering (AML) and know-your-customer (KYC) process to provide high-risk business verification. It raises the bar for the scammers and provides in-depth identity insurance for the customer. The EDD will conduct the risk assessments of the business and customers. It is mainly designed to deal with the high-risk and hefty amount of transactions clients. These persons are always vulnerable to the financial institutes and pose a greater risk of being involved in illicit activities. EDD ensures the banks and other organizations' customers are legal and everything is up and up.
Financial institutes mostly rely on KYC derivatives to ensure the client's identity before onboarding. But these are only reliable for verifying the customer with low risk for high-risk clients companies utilize enhanced due diligence measures. The EDD is used chiefly when someone becomes a client or applies for a product or service depending on the specific nature of their demand, or sometimes certain signs may indicate an increase in risk associated with an existing business relationship. For instance, if the customer or a business partner is identified as an Exposed Person (PEP) or a family member or close associate of a PEP. This implies that the customer has connections to authorities such as heads of state or government officials and could be involved in activities, like corruption and money laundering.
EDD is used in an investigation process that goes beyond due diligence practices. Its purpose is to gather an understanding of customers or business relationships in industries prone to higher risks of money laundering, fraud, and financial crimes. To achieve its aims of obtaining information about customers' backgrounds, activities, and potential risks involved during EDD compliance, companies take various steps. Here's an overview of how EDD's conducted;
Before starting the EDD process, companies define the risk associated with the clients by risk approach. It discloses the level of risk at which the client falls. In the risk assessment, there are various factors which rely on, such as the location of the business, shareholders, product, and business activities, are checked. Risk management ensures that financial institutes know about customers' backgrounds and profiles. According to the risk assessment result, companies follow enhanced due diligence or customer due diligence. It enables the banks and financial institutes to create a rigid due diligence process for the customer, which complies with the risk associated with their business.
After conducting a risk assessment approach, banks and financial institutes know the essential documents they need from businesses to comply with AML regulations. EDD entails an analysis of the customer's resources and wealth. This encompasses gaining insight into the origin of the funds associated with their business dealings and evaluating the authenticity of said funds. A thorough investigation is carried out on the customer, encompassing their track record in business, reputation, and any potential links to activities. This may involve checking for media coverage of past disputes and actions taken by regulatory authorities.
To comply with enhanced due diligence, companies must conduct watchdog database screening. these are various secure databases from the international and national regulatory authorities such as the AML, politically exposed persons (PEPs) or others. These screenings depend on companies' policies and the nature of the service user and business needed by the financial institutes. This cross-check ensures organisations that the investors or not any shareholders are involved in any criminal activities.
Financial institutes can utilise advanced technology to comply with the EDD measurements. Digital identity verification software concludes the risk approach and provides enhanced due diligence KYC. The online verification software uses advanced machine learning and AI technology to confirm the customer's identity according to EDD compliance derivatives. It ensures that financial institutes get accurate results and seamless onboarding experiences without drawbacks to customer ratios. EDD banking is commonly used in financial institutes to combat money laundering and terrorist financing crimes effectively. Simultaneously, with international standards and robust technology, financial institutes can enhance security and mitigate risk during business and customer onboarding.
Overall, the EDD in banking assists companies in onboarding high-risk profile customers by ensuring they are not involved in illicit activities. Simultaneous compliance with enhanced due diligence and KYC ensures that financial institutes ban scammers in the first step and secure their AML system. It bolstered the companies' security and protected them from money laundering and terrorist financing, including streamlining the customer onboarding experience. Furthermore, it enabled financial institutions to detect suspicious activities quickly and efficiently. This helps to reduce the risk of financial losses and fines. Additionally, it helps to protect the reputation of financial institutes.