What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence (EDD) is a comprehensive framework of rules and procedures designed to address high-risk clients and significant financial transactions. It is a more in-depth risk assessment process than Customer Due Diligence (CDD), which is required for all customers. EDD is required for customers or business relationships that pose increased exposure to banks due to potential money laundering or terrorist financing risks.
Purpose of EDD
The purpose of EDD is to identify and assess the level of risk posed by high-risk customers or business relationships. This is done by gathering and analyzing information about the customer or business relationship, including their identity, source of funds, and intended purpose of the business relationship.
Risk Assessment
EDD involves a risk assessment to determine the level of risk posed by a customer or business relationship. This assessment is based on a variety of factors, including the customer’s or business relationship’s country of residence, the type of business or transaction, and the amount of money involved.
Compliance Requirements
Companies are required to use EDD procedures when doing business with organizations or individuals such as politically exposed persons (PEPs), customers from high-risk or sanctioned countries, or in situations with an increased risk of money laundering.
Steps for EDD
To effectively implement EDD, practical steps recommended by the Financial Action Task Force (FATF) include:
Key Facts
- Definition: Enhanced Due Diligence (EDD) is a comprehensive framework comprising rules and procedures designed to address high-risk clients and significant financial transactions.
- Purpose: EDD is required for higher-risk customers or business relationships that pose increased exposure to banks due to potential money laundering or terrorist financing risks.
- Risk Assessment: EDD involves gathering and analyzing information about high-risk customers or business relationships to identify and assess the level of risk they pose.
- Compliance Requirements: Companies are required to use EDD procedures when doing business with organizations or individuals such as politically exposed persons (PEPs), customers from high-risk or sanctioned countries, or in situations with an increased risk of money laundering.
- Steps for EDD: To effectively implement EDD, practical steps recommended by the Financial Action Task Force (FATF) include gathering additional identification information, conducting more thorough searches, verifying the origins of funds, obtaining detailed information about the purpose and nature of the business relationship, and commissioning intelligence reports on customers or their beneficial owners.
- Customer Due Diligence (CDD) vs. EDD: While CDD focuses on confirming a customer’s identity, EDD goes beyond CDD by conducting more thorough investigations and risk assessments, especially for high-risk clients and large-scale financial transactions.
- Gathering additional identification information
- Conducting more thorough searches
- Verifying the origins of funds
- Obtaining detailed information about the purpose and nature of the business relationship
- Commissioning intelligence reports on customers or their beneficial owners
CDD vs. EDD
CDD focuses on confirming a customer’s identity, while EDD goes beyond CDD by conducting more thorough investigations and risk assessments, especially for high-risk clients and large-scale financial transactions.
Sources
- Enhanced Due Diligence (EDD) | iDenfy
- Enhanced Due Diligence (EDD) – Sanction Scanner
- Enhanced Due Diligence (EDD) | Dow Jones
FAQs
What is EDD in compliance?
EDD stands for Enhanced Due Diligence. It is a comprehensive framework of rules and procedures designed to address high-risk clients and significant financial transactions.
When is EDD required?
EDD is required for customers or business relationships that pose increased exposure to banks due to potential money laundering or terrorist financing risks.
What is the purpose of EDD?
The purpose of EDD is to identify and assess the level of risk posed by high-risk customers or business relationships.
What are the steps involved in EDD?
The steps involved in EDD include gathering additional identification information, conducting more thorough searches, verifying the origins of funds, obtaining detailed information about the purpose and nature of the business relationship, and commissioning intelligence reports on customers or their beneficial owners.
How is EDD different from CDD?
CDD focuses on confirming a customer’s identity, while EDD goes beyond CDD by conducting more thorough investigations and risk assessments, especially for high-risk clients and large-scale financial transactions.
Who is responsible for conducting EDD?
Companies are responsible for conducting EDD on their customers or business relationships.
What are the consequences of failing to conduct EDD?
Companies that fail to conduct EDD may be subject to fines, penalties, or other enforcement actions.
What are some examples of high-risk customers or business relationships that may require EDD?
Examples of high-risk customers or business relationships that may require EDD include politically exposed persons (PEPs), customers from high-risk or sanctioned countries, and customers or business relationships involved in complex or unusual transactions.