Why Is Enhanced Due Diligence So Important?
When referring to KYC (know your customer) principles, there are various risk rating categories established for customers. The most common ones are high net worth, high risk, low net worth, and low risk. EDD banking refers to the due diligence that is set up when dealing with different types of customers.
To put it as simple as possible, EDD is a set of procedures and processes that were designed to handle the customers that are labeled as being of high risk and the larger financial transactions. High risk categories can be considered as being so because of different reasons, not because of the risk that is posed to a financial body.
Why Is EDD Important?
It is important to regulate transactions for high risk customers simply because of security considerations that are state-based. EDD became compulsory through the 2001 Patriot Act and things are not going to change in the future.
Private banking institutions, correspondent accounts, and offshore banks have to obey EDD regulations and laws. These are now seen as being robust because they include the need to get a lot of evidence.
The whole EDD process needs to be properly documented, all in precise details. That is especially the case when the risk of a client is assessed or when an account is opened. Regulators need access to all the data handled by these institutions in the event that suspicious activity is identified. Documents gathered from all the mined data is utilized to report the suspicious activities identified, including money laundering.
Factors Affecting Enhanced Due Diligence
An important thing to know about EDD is that the process is ongoing. It is affected by many important outside factors. This includes geographical, customer and extra risk factors. Those that are often mentioned are:
- Customer Factors – Risk regulation for the institution has to comply with all AML laws. Risk factors do include situations where many customers are not residents of the country of operation and so much more. Even customer tendencies or a connection with a relative can be considered.
- Geographical Factors – These play a very important role in enhanced due diligence, especially when referring to diplomatic relations. Those from a politically sanctioned country can be classified instantly as being high risk simply because they want to make a transaction. In addition, the locations that have designated terrorist organizations that are active have citizens automatically labeled as being of high risk.
- Other risk factors – When looking at the private banking sector, a high confidentiality level exists. Revenue is what drives the entire industry. Due to this, terrorist financing and money laundering can be common.
In order to prevent terrorist financing and money laundering, enhanced due diligence became very standard practice, one that is nowadays mandatory. It is needed before a business relationship is reached between parties. This does include money deposits or simple financial transactions.
If a business relationship is started with a customer, he/she/it needs to be verified after being properly identified. Fortunately, EDD is just a one-time process. No further verification or identification will be needed until something bad happens.