Enhanced Due Diligence: How Important is it for Banks?

In today’s business and regulatory climate, a business has to take all precautionary steps to prevent fraud. This means identifying and verifying customer’s identities and meeting KYC guidelines. Whenever a financial institution starts a new business partnership with individuals or organizations without fully knowing their past and present business dealings, it can open the business to huge lawsuits and fines. EDD (Enhanced Due Diligence) can help businesses understand their customers.

As a matter of fact, over the last decade over $26 billion in fines have been imposed across the U.S., Europe, APAC, and the Middle East against financial institutions for KYC/AML. But KYC compliance goes beyond ticking some checkboxes. KYC helps financial institutions understand and serve their customers in a better way.

The KYC process is often carried out by financial institutions while opening new accounts with online users. Customer Due Diligence (CDD) is a vital part of KYC verification, which usually involves background checks to assess the risk they pose to a business. In the financial sector, this usually involves verifying the users for creditworthiness and ensuring that these people aren’t on a money laundering or counter terrorism financing watchlist.

Fortunately, most of these verifications and AML verification processes are becoming automated so businesses can offer a better customer experience during onboarding. With Customer Due Diligence (CDD) financial institutions perform important checks.

What is Enhanced Due Diligence?

(EDD) Enhanced Due Diligence is part of the KYC verification process that offers a greater level of scrutiny of potential business partnerships and highlights risks that can’t be detected by customer due diligence. Enhanced due diligence requirements are an upgraded version of CDD that looks to establish a better level of identity verification by using customer ID data and evaluating the risk category of the customer.

EDD is specifically designed for dealing with high-risk customers and large transactions. These customers and the transactions they conduct pose greater risks to the financial sector, these customers and transactions are continuously monitored to ensure that nothing is out of place. 

There are several characteristics that EDD from regular KYC policies:

  • Rigorous & Robust: EDD policies have to be rigorous and more robust and should require more data for customer authentication.
  • Detailed Documentation: The EDD process has to be documented in detail, and regulators should be able to have immediate access to enhanced due diligence reports.
  • Reasonable Assurance: EDD requirements require “reasonable assurance” while building a risk profile. 
  • Going Through PEPs: Banks and financial institutions need to pay attention to Politically Exposed Persons (PEPs) lists. People on these lists are viewed as being a higher risk because they are in positions that can be exploited for money laundering. 

Another major challenge with EDD is knowing how much information is there to collect. Regulators have consistently favored financial institutions that leverage documented policies & procedures.

More and more companies are combining online identity verification and automated AML screening during the account onboarding process.

Enhanced Due Diligence Checklist

So, what do banks and financial institutions get out of using EDD as part of their KYC verification process? Here’s the Enhanced due diligence checklist:

1. Better Serve Your Customers

The EDD and identity verification process offer a bunch of useful information regarding your customers, including employment status, age, and so on. This data can be used to provide customers with better services. 

2. Enhance Brand Reputation

Whenever a bank, financial institution onboards a new customer with EDD, they can help in the prevention of corrupt politicians, criminals, and terrorists from entering the ecosystem. This also means that taking the precautions to know your customer at a more fundamental level.

Businesses need to build robust safeguards that help in defending against losses for fraud, non-compliance fines, and loss of brand reputation.

3. Financial Crime Prevention

All the ideas of knowing your customers, verifying identities, making sure they’re real, and cross-referencing customers from PEPs and Sanction lists. Enhanced due diligence and other fraud prevention methods such as bank account verification software allow businesses to focus on scaling their businesses instead.

4. Build Trust

Unfortunately, as more and more cases of data breaches, money laundering, and financial fraud are being uncovered, customers are losing trust in the banking sector. It is high time for banks, financial institutions, payment providers, and others to stop the flow of money laundering and other financial crimes. 

This can happen by integrating identity verification and identity screening technologies into the KYC workflow. With a secure digital-first approach, it is possible for banks to digitally onboard customers from all over the world while ensuring security and enhanced positive customer experience.

enhanced due diligence