Enhanced due diligence (EDD) is a set of efficient measures to monitor high-risk business profiles. EDD involves a thorough investigation of the company and the employers of that company to mitigate the risks. Despite FATF regulations, research shows about $2tn in illicit cash flows through the global financial system. Therefore, enhanced due diligence is done to maintain business economic stability by complying with legislation and enforcement actions.
Corporations trying to combat money laundering and terrorist financing understand the importance of EDD in the business.
What Is Enhanced Due Diligence?
EDD is an ongoing review of businesses to monitor unusual transactions and suspicious activities. Before onboarding the company, more than due diligence is needed; companies exposed to high-risk potentials must deal with enhanced due diligence. The Patriot Act of 2001 states that financial institutions and offshore banks must comply with enhanced due diligence—these security concerns.
The EDD process must review the legal, financial, and all other relevant business documents while onboarding. These documents are checked against databases at different stages to assess risks and threats. It is detected if a company is involved in any suspicious activity, such as money laundering or fraud.
Why Are Enhanced Due Diligence (EDD) Requirements?
Corporations are required EDD if they are going to do business with the following organizations:
- Any business belonging to the high-risk and third-world countries list
- Politically Exposed Persons (PEPs), people on any watchlist or sanction list
- Gambling companies
- Shell corporations
- Fintech companies
- Companies licensed with crypto
- Ultimate beneficial owners (UBO)
- Organizations that fund terrorist activities and blacklisted
- Private banking
Enhanced Due Diligence EDD In Banking
EDD in banking is critical in assessing the risks associated with red flags in the finance industry. It involves collecting business data to identify involvement in money laundering or any other financial crime. The Financial Action Task Force (FATF) recommends a due diligence approach in banking to avoid such potential risks. These practical initiatives are mentioned below:
- Gathering information from a wide range of reliable and independent resources
- Adverse media screening for detailed investigation
- Intelligence report on the beneficial owner to detect his involvement in suspicious activities
- Getting the information about the intent, nature, or purpose of the business
- Banks must adopt a risk-based monitoring strategy to discover any risk profile changes.
Importance of Enhanced Due Diligence EDD Compliance
Beyond any doubt, EDD plays an influential role in business verification and fraud prevention. However, it provides a lot of other benefits to businesses.
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Healthy Financial Relationship
The main task of enhanced due diligence is business verification for risk management. Meanwhile, it records transactions that positively affect business-to-business relations (B2B). When all companies experience such transparency when dealing with one corporation, it builds more trust in the financial relationship.
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Protection from Money Laundering
During EDD, businesses are checked against the Enhanced Due Diligence Checklist to detect which ones are involved in money laundering. This ensures the business’s compliance with anti-money laundering (AML) regulations. In this process, the people behind those businesses, such as beneficiaries, directors, and shareholders, are also screened against the database. Enhanced compliance with AML EDD and CTF regulations at every stage of business provides safety from hefty fines.
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Build Credibility In The Industry
Enhanced Due Diligence is a way to build a positive image in the industry. Financial institutions are guaranteed safety from potential risks when they comply with AML and CFT regulations. Simultaneously, when an organization constantly monitors the transactions of all companies, it builds credibility. All other businesses in the market start to trust more.
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Fraud Prevention
Terrorist financing, bankruptcy, bribery, and other fraud schemes are real threats to the financial industry. Businesses complying with AML and CTF regulations are protected from fraudsters, allowing organizations to focus more on professional goals and growth.
Summing It UP
Enhanced Due Diligence is an ongoing monitoring process of a business to counter financial crimes. It plays a significant role in risk management and mitigation. Businesses are verified through this process and can detect potential risks without delay. Any unusual transaction can be detected, which prevents fraud. FATF recommended approach is a reliable way to be alert about red flags. The data of businesses and business people are scrutinized by databases of legal authorities. KYB procedures help out in ongoing monitoring and to comply with AML and CTF regulations. Having secure transaction methods means safety from financial penalties.
