A Firm’s Responsibility To Perform Enhanced Due Diligence For AML

Organizations worldwide continue to evolve and streamline their processes using the latest technologies that allow them to comply with global regulations. While generating revenue is deemed as the primary task, it has become equally crucial to keep an eye on customers and their activity as well. This means that firms must verify customer identities and client business entities to analyze the amount of risk associated with them. For this purpose, global regulatory authorities have made EDD (Enhanced Due Diligence) procedures for AML (Anti-money Laundering) compliance mandatory.

Understanding EDD and Client Due Diligence

To understand the concept of EDD compliance, we must first understand what client due diligence, or KYC due diligence, actually means.

The client due diligence process is implemented by businesses on every customer that is onboarded. The steps involved are fairly simple. It involves the verification of customer identity, age, address, contact number, etc. By collecting this information, it is then matched against government databases for authentication purposes. This procedure can also be implemented by using biometric technology, where facial recognition is used to verify customers in real-time.

On the other hand, enhanced due diligence for AML is the process of identity proofing and background screening customers that qualify as high-risk entities. This involves identity verification along with AML screening procedures. During this process, the customer is screened against criminal watch-lists, Politically Exposed Person (PEP) lists, global sanctions, and adverse media news. This step is necessary for keeping a close check on high-risk customers that may be prone to commit fraudulent activities such as money laundering.

Customer Criteria for Enhanced Due Diligence

When deciding which customers require EDD for AML, the following criteria must be kept under consideration:

–  Customer Risk Factors

• The entity is a PEP
  • The customer is a Special Interest Person (SIP)
  • The customer or the entity is found on a sanction list
  • A large amount of negative or adverse media news is associated
  • The customers or entity performs unusual, complicated, suspicious, or purposeless transactions

–  Geographical Risk Factors

• Countries present on sanction lists or have embargoes against them
  • High-risk third-world countries
  • A country found on the FATF’s gray-list (list of Other Monitored Jurisdictions)
  • A country found on the FATF’s black-list (list of Call for Action Jurisdictions)
  • Any country with high terrorist activity

The FATF’s Risk-Based Approach

According to the Financial Action Task Force (FATF), all countries and businesses that deal with high-risk entities must perform a risk-based approach through Enhanced Due Diligence for AML compliance. The 40 Recommendations by the FATF, published back in 2004, clearly states that businesses must adopt a risk-based approach to make the best use of resources. Consequently, it is necessary for tackling the risk associated with suspicious transactions and customers.

The EDD process can be effectively utilized once the KYC process has been completed. During KYC, high-risk entities are identified, while during EDD, high-risk entities are dealt with.

Analysis of Further Information

Another significant part of the EDD process involves the investigation of the Ultimate Beneficial Owners (UBO) and the Source of Funds (SOF). This allows the organization to ensure that the client’s origin of income is financially legal. Any discrepancy found in sources of income is dealt with during this process.

Continuous Transaction Monitoring

The KYC and EDD process works hand-in-hand. Both of these processes involve ongoing monitoring of the customer’s data and their transactions. During this stage, details such as the duration of the transaction, the type of transactions made, the amounts used, etc. also go through an in-depth inspection.

The Enhanced Due Diligence Checklist

Currently, there is not a specific set of guidelines that must be followed during the enhanced due diligence process. However, there is a general checklist that businesses follow to curb the risks associated with customers. Here’s a gist of what the EDD checklist includes:

• A thorough analysis of the customer-associated risks
• Obtaining additional paperwork and information from official sources
• Ongoing background checks for updated risk assessment.
• Identifying the origin of the customer’s funds to ensure the cash was not obtained through criminal activities
• Organizing customer data in such a way that it becomes accessible for regulators in the event of auditing

Consequences of Not Performing EDD

Once a business has identified suspicious customers and entities, a failure to implement enhanced due diligence measures can result in disastrous consequences. Since high-risk entities have a higher chance of committing fraud such as money laundering or financing of terrorist activities, EDD procedures are crucial for avoiding fraud losses.

In simple terms, a business would be risking its financial integrity and brand reputation by avoiding EDD measures. Apart from this, whenever the business is audited to check whether it’s AML compliant, chances are that the firm could face huge sums of fines, penalties, and lawsuits that otherwise could have been easily prevented.