Enhanced Due Diligence (EDD)

Key Facts and Insights

Financial institutions, insurance companies, and many other organizations are required to take appropriate measures to prevent money laundering, financial fraud, and terrorism financing. As part of Know Your Customer (KYC) procedures, they must implement mechanisms to assess the trustworthiness and risk level of customers and business partners.
Enhanced Due Diligence (EDD), literally “enhanced or strengthened due diligence”, is one such examination process and an integral component of the broader KYC framework.

Definition: What Is Enhanced Due Diligence?

The term Enhanced Due Diligence (EDD) refers to the in-depth verification and analysis of customers, business partners, or organizations with regard to their economic, legal, tax, and financial circumstances.
Studies show that a strictly implemented EDD process can reduce the risk of fraud and financial loss by up to 80 percent. Therefore, an efficient EDD process is a mandatory requirement for banks, insurers, and other businesses whenever one or more of the indicators listed below apply.

Difference Between Standard Due Diligence and Enhanced Due Diligence

Standard Due Diligence (SDD) refers to the general due diligence obligation. It typically involves verifying identification documents (see also Customer Due Diligence, CDD) and assessing customer information, the source of funds, and the financial situation of the respective customer or partner.
Enhanced Due Diligence, by contrast, is more comprehensive and goes deeper into assessing potential risks associated with high-risk customers and transactions.

When Does Enhanced Due Diligence Apply?

According to the GwG, EDD must be carried out in addition to standard due diligence if one or more of the following factors are present:

1. High-Risk Country or Jurisdiction:
   If an individual or company is based in a high-risk country or third country – i.e., one with weak anti-money-laundering (AML) regulations – Enhanced Due Diligence checks are mandatory.
2. Person’s Status:
   Politically Exposed Persons (PEPs), their family members, or known close associates must undergo enhanced due diligence.
3. Criminal Suspicion:
   If there is even a minor suspicion of criminal activities or transactions during the simplified review process, an EDD must be conducted.
4. Unusual Business Structures:
   Private individuals or entities with particularly complex, unusually large, or irregular transactions, or those lacking a clear lawful purpose, must be examined under EDD guidelines.
5. High-Risk Industries:
   Businesses operating in high-risk sectors such as cryptocurrency, gambling, or arms trading are also typically subject to EDD requirements.

To detect whether one or more of these factors apply, companies must begin early by choosing a legally compliant identification solution for their KYC process that can trigger an enhanced risk assessment when needed.

Measures for Conducting Enhanced Due Diligence

Enhanced due diligence is embedded within KYC and AML legal frameworks. Financial institutions and businesses must ensure they have the capacity to carry out extended reviews of individuals and transactions.

Typical EDD measures include:

• Verification of Bank Accounts:
  Conducting microtransactions to confirm bank account details.
• Biometric Identity Verification:
  Using biometric data in addition to ID document copies.
• Verification of Source of Wealth:
  Reviewing the origin of assets and beneficial ownership.
• Media Screening:
  Investigating media reports to identify potential links to illegal activities.
• Transaction Monitoring:
  Closely monitoring suspicious transactions and ensuring proper documentation.
• Sanctions Screening:
  Checking against national and international sanctions lists.
• Intelligence Reports:
  In certain cases, requesting intelligence or background reports.

Record-Keeping in the EDD Process

Detailed records must be kept throughout the EDD process. These serve as the foundation for a comprehensive and traceable risk assessment.

Challenges in Implementing Enhanced Due Diligence (EDD)

One of the greatest challenges in applying EDD is balancing compliance requirements with customer expectations for fast and seamless processes.

Beyond this, financial institutions and other organizations face several critical issues:

1. Regulatory Complexity:
   Since EDD requirements can vary by jurisdiction, it can be difficult to stay compliant across different legal frameworks.
2. Regulatory Changes:
   Failure to stay informed about updates to EDD regulations can result in significant penalties and compliance breaches.
3. Interpretation Gaps:
   Differences in how regulations are interpreted can lead to grey areas and potential compliance risks.

However, by leveraging modern technologies (such as advanced identity verification tools and transaction monitoring systems) organizations can implement EDD requirements more efficiently and securely. Combined with regular compliance training, these tools help mitigate the challenges mentioned above.

Repeating Enhanced Due Diligence

There are no fixed legal rules defining how often EDD must be repeated. As a general guideline, documentation from completed EDD processes must be retained for five years under the GwG. After this period, a renewed review is advisable for compliance assurance.
If transactions show unusual or suspicious activity, the EDD process should also be repeated immediately.

Consequences of Failing to Perform Enhanced Due Diligence

Failure to comply with EDD obligations can lead to severe financial penalties and significant reputational damage.
The latter can have long-term negative effects on a company’s financial stability and customer relationships.

About WebID

WebID supports organizations across various industries optimize their processes with innovative, compliance-ready identification solutions tailored to their specific needs.
WebID customers benefit from seamlessly integrable solutions such as VideoID (Review), VideoID (Live) and AccountID, which have become benchmarks in the banking sector thanks to state-of-the-art technology.
This expertise can be leveraged within Enhanced Due Diligence procedures to improve efficiency, accuracy, and security of identity verification for both customers and business partners.