Enhanced Customer Due Diligence:
Any financial institution (Banks and NBFC’s) has to follow the KYC process when they are opening any relationship with the customer (Customer on boarding/ Account Opening). This is part of the global efforts to comply with Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) laws, to protect the business from fraud and bad actors.
During the KYC process, Customer Due Diligence is a key measure that scrutinizes the risk exposure of a customer.
However, in some cases the regulatory compliance extends beyond the customer on boarding stage, when additional or enhanced checks are required.
What is Enhanced Customer Due Diligence (ECDD)?
Enhanced customer due diligence, or ECDD, are additional checks to minimize the risk exposures, violations of regulatory compliance, and prevent financial crimes arising from money laundering or terrorist financing. EDD procedures are applicable to all entities, whether individuals or non_individuals (businesses), which are deemed ‘high risk’ or mandated under the law for, enhanced diligence.
Why is ECDD required?
ECDD is required where the client and/or business transaction poses a high risk of financial crime.
When is ECDD required?
Risk-based approaches to client on boarding are based on the regulator guidelines, nature of transactions, business relationships and industry type.
However, broadly, ECCD is required in any one, or more, of the following cases:
- where transactions are large and high amounts.
- where a business relationship is established with a high net worth entity(Non_Individual, Example Limited company, proprietorship firm and Trust).
- where KYC risk rating /compliance risk assessment indicates high risk exposure.
- where the national regulator lays down specific instances where ECDD is to be performed;
- in the case of certain businesses; like crypto currency, gambling and offshore banking;
in the case of certain business relationships, for instance with shell banks;
- in the case of PEPs (Politically Exposed persons), their close associates or family members;
- Where a business relationship is established with an entity belonging to a sanctioned country.
What do you do when the situation or client requires ECDD?
Turning away the client and denying business that maybe legitimate, can create a loss of revenue and growth. So a risk-based approach is recommended by FATF(Financial Action Task Force).
The ECDD recommendations include:
- Rigorous checks of documents and data provided by client,
- Additional information
- Obtained from the client, about the purpose and proposed nature of the business relationship,
- Gathered about the client, from varied and robust sources,
- About the source of funds to satisfy that they do not constitute the proceeds from crime,
- Carry out further checks, like adverse media searches and criminal records,
- Ensure immediate access to such information to minimize exposure to risks of financial crime,
- Use of third-party compliance software like sanctions screening APIs and SaaS,
- On-going monitoring even after client on boarding, that includes financial sanctions and PEP screening,
- Check the Ultimate Beneficial Ownership Structure (UBO),
- Suspicious reporting to authorities.
The approach to diligence should ensure constant monitoring to identify potential triggers like changes in the product/service, business relationship, and suspicious patterns in transactions or concerns about information collected.
Advantages of EDD
- Implementing enhanced diligence ensures minimizing on opportunities lost, while ensuring the institution is not exposed to risks of financial crime or terrorist financing activities.
- In the event of any ML/TF incident, if EDD rules are adhered to, penalties may not be applicable.
- EDD can be adapted to size of the institution, making it very suitable for SMBs engaged in high-risk sectors like money remittances
CDD and ECDD FAQ
What is CDD and EDD?
CDD – Customer Due Diligence is a process of KYC which is used to gather customer’s data about identity, address and to evaluate the risk category of the customer. In general it is a kind of basic scrutiny about a customer. EDD-Enanched Due Diligence is a additional KYC process to be followed for high risk customers.
What is CDD Customer Due Diligence?
Customer Due Diligence (CDD) information comprises the facts about a customer that should enable an organisation to assess the extent to which the customer exposes it to a range of risks. These risks include money laundering and terrorist financing.
Why is CDD important?
Enhanced Due Diligence for Higher-Risk Customers
It is crucial that all securities firms and financial institutions understand that CDD and risk scoring a customer or entity is an ongoing process, and firms must take measures to ensure account profiles are current and monitoring is risk-based.
What are the 3 stages of money laundering?
There are three stages involved in money laundering; placement, layering and integration. Placement –This is the movement of cash from its source. On occasion the source can be easily disguised or misrepresented.
What is PEP KYC?
In financial regulation, “politically exposed person” (PEP) is a term describing someone who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold.
What are the three 3 components of KYC?
They usually frame their KYC policies incorporating the following four key elements:
Customer Acceptance Policy;
Customer Identification Procedures;
Monitoring of Transactions; and.