Beyond basic customer due diligence, or CDD, it’s important that you carry out the correct processes to ascertain whether enhanced due diligence, or EDD, is necessary. Enhanced due diligence is a level of customer due diligence that provides a greater level of scrutiny of potential business partnerships and highlights risk that cannot be detected by regular customer due diligence measures.
This can be an ongoing process, as existing customers have the potential to transition into higher risk categories over time. In that context, conducting periodic due diligence assessments on existing customers can be beneficial.
Enhanced Due Diligence Challenges
A major problem during EDD is understanding how much information about a customer is necessary. The solution to this problem can be a factor-based risk rating approach. Factors one must consider to determine whether EDD is required, include, but are not limited to, the location of the person, the occupation of the person, the type of transactions a person conducts, the expected pattern of activity in terms of transaction types, value and frequency, and the expected methods of payment.
12 Risk Factors for Enhanced Due Diligence
There are several individual risk factors that should be considered for any enhanced due diligence. These risk factors can be allocated to different categories, which are described in the following. The Financial Action Task Force address the required for enhanced due diligence in its Recommendation 10.
Customer Risk Factors
In terms of the customer risk factors, there are six attributed that can lead to EDD.
- Firstly, the bulk of your customer’s customers are clients that are foreigners or non-residents.
- Secondly, your customer is an asset-holding vehicle.
- Thirdly, your customer is a Politically Exposed Person, or PEP, or are a politically exposed person’s family members or known associates.
- Next, your customer has nominee shareholders or shares of the company are issued in bearer form.
- Fifthly, your customer is a cash-intensive businesses.
- And lastly, your customer is expected to exceed certain limits in the amount of daily cash transactions. For example in Switzerland, this amount starts at one hundred thousand francs.
Geographical Risk Factors
Secondly, there are geographical risk factors that can lead to EDD. These factors include the following six attributes.
- Firstly, countries without adequate anti-money laundering prevention systems as identified by credible sources. For example North Korea and Iran, that have been identified by the Financial Action Task Force as having material deficiencies.
- Secondly, countries under sanctions and embargoes or similar measures. This can include countries such as Russia, Iran and North Korea, which are sanctioned by the United States of America.
- Thirdly, countries notorious for prevalent levels of corruption as identified by credible sources. For example Venezuela, Yemen that have been listed as such on the transparency index list.
- Fourthly, countries blacklisted for financing or supporting terrorist activities. According to the State Sponsors of Terrorism list, these countries include Iran, Syria, and Sudan.
- Fifthly, locations that have designated terrorist organisations operating within their country. Examples for this are Syria, Iraq and Somalia.
- Lastly, countries that are not members of the Financial Action Task Force and its partners.
Additional Risk Factors
In term of additional risk factor categories, there can be other risk factors which might lead to enhanced due diligence, but which is rather individual to certain types of organizations or financial institutions. This includes private and correspondent banking for example. These banks are revenue driven and maintain a high level of confidentiality. Hence, they are naturally more prone to money laundering than others.
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