Intensified Background Check Procedure (IBCP)
Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are essential components of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations. These processes are designed to verify a customer's identity, assess their risk profile, and ensure compliance with Know Your Customer (KYC) requirements.
Customer Due Diligence (CDD)
CDD is the standard verification and risk assessment process applied to all customers. It involves collecting and verifying basic customer information, including identity and beneficial ownership, and assessing risk factors like location, occupation, and transaction behaviour to classify the customer’s risk level (low, medium, or high). CDD is the "first line of defense" against onboarding fraudulent entities.
Enhanced Due Diligence (EDD)
EDD is triggered when customers are identified as high risk, such as Politically Exposed Persons (PEPs), individuals or entities with complex ownership structures, or those connected to high-risk jurisdictions. Under EDD, additional scrutiny is applied, including more thorough background checks, ongoing monitoring, gathering of detailed information about the customer’s source of funds, and closer examination of transactions to detect suspicious activity.
To get EDD done the right way, a risk-based approach should be employed, and additional identifying information should be obtained from high-risk customers. This information can be obtained from a questionnaire specifically designed for such customers, as well as from certain documents such as official corporate records from the company’s management, registration documents from the local Registrar of Companies, articles of incorporation, partnership agreements, business certificates, names and locations of customers and suppliers, banking information and relationships with other financial institutions, identity of board members and beneficiaries, for Politically Exposed Persons (PEP) - title and details on the position the PEP holds or held, if the PEP is a close associate or family member, their identity, title, role, and level of proximity to public office should be established.
Adverse media and negative checking are part of EDD and involve analyzing press articles, reports, and other media to shed light on the reputation of the customer and help build a full customer profile.
Ongoing monitoring is required under AML regulations and should be performed during the customer’s onboarding, during transactions, and as part of ongoing monitoring of the customer’s profile. Ongoing monitoring of high-risk customers requires a lot of time and effort and would benefit from an appropriate monitoring strategy for every high-risk customer.
Differences between CDD and EDD
While EDD is considered to be an extended variation of CDD, there are significant differences between them. EDD is a set of measures applied in situations that indicate a higher risk of money laundering and terrorist financing. EDD might require additional information not only from the customer but from third parties as well, such as banking information, information on relationships with other financial institutions, information about board members and beneficiaries, official corporate records from the company’s management.
Transaction monitoring includes assessing the customer transaction history, transaction details such as the background, purpose, nature, duration, and parties involved. By definition, all financial companies need to comply with AML requirements and, when necessary, apply EDD.
EDD software solutions can be cloud-based or on-premises, and KYC compliance providers offer automated EDD. EDD requires verifying the legitimacy of the source of funds and source of wealth for individuals, companies, and companies’ beneficial owners.
Neglecting to perform the required level of customer due diligence may lead to legal, financial, and reputational consequences. In 2020, more than 212 individuals were fined $99.3 million for AML compliance breaches. For instance, Credit Suisse Group AG was accused of being involved in fraud and violating internal accounting controls and agreed to pay a total of $475 million to settle these charges.
Applying EDD is necessary to avoid high-risk situations that lead to hefty fines. A checklist for evaluating the readiness of an EDD program includes understanding the customer’s risk profile, obtaining additional information where necessary, conducting extensive background checks and monitoring transactions, organizing and securing data in line with compliance standards, and keeping the data available for regulators.
Businesses in the finance and technology industry must ensure compliance with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations through Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) processes. In CDD, basic customer information is collected and risk factors are assessed, while EDD applies additional scrutiny to high-risk customers, requiring more thorough background checks, detailed information about the source of funds, ongoing monitoring, and verification of the legitimacy of the source of funds and wealth. Adequate EDD measures are particularly important in the finance industry to avoid high-risk situations that can result in hefty fines and reputational damage.
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