Over the past ten years, financial regulators in the APAC, Europe, Middle East, and the US have assessed nearly $26 Billion in financial penalties on financial institutes for breaching KYC-related regulations. It is now more difficult for financial organizations to meet their legal obligations regarding anti-money laundering and KYC measures.
Companies must recognize and verify their client’s identities and accurately assess the risk level of each client. This procedure, known as KYC, needs organizations to conduct enhanced due diligence. Neglecting this procedure when establishing new business partnerships with organizations or individuals exposes financial institutes to significant regulatory fines or lawsuits.
What is the EDD Process?
EDD, a client verification procedure known as KYC, sought to gather comprehensive information and data to verify the client’s identity. The EDD process works similarly to the customer due diligence (CDD) procedure but goes beyond subjecting business partnerships to identify risks.
EDD is crucially designed to manage clients with substantial wealth, large-scale transactions, and high-risk profiles. These transactions and individuals pose considerable risks to the financial sector. That’s why they are subject to close monitoring and stringent regulations by regulatory authorities. Hence, organizations are bound to enforce EDD measures while conducting business with the following individuals or organizations:
- Any company located in a country that appears on the high-risk third countries list.
- Politically exposed persons (PEPs) or users linked with them, including their extended family members.
- Shell companies are established for illegal purposes, including tax evasion or money laundering.
- Companies that are involved in financing terrorist activities are blacklisted.
- Banking relationships and private banking involve higher risks due to the potential for illegal financial transactions and money laundering.
EDD surpasses CDD by striving for a higher level of identity verification. It accomplishes this by accumulating extensive information about the client’s address, and identity and assessing the risk level linked with the client. Its policies are more comprehensive and stringent than CDD policies, as they strive to understand better. Hence, the EDD KYC process must collect more detailed information and evidence.
Furthermore, the whole EDD procedure should be meticulously documented, and the gathered information securely stored. This requires more attention to validating and capturing data sources. If regulators request an EDD report regarding a client, instant access to the information must be granted.
Moreover, unlike CDD measures, EDD essentials require the application of reasonable assurance” while determining the KYC risk rating. Experts deciding whether to onboard a client should have completed all essential steps.
Due Diligence Compliance
The process for KYC and due diligence differs among territories and countries. For example, within the European Union, companies must follow the guidelines and rules outlined in the 5AMLD framework. On the contrary, the Financial Action Task Force (FATF) designates the framework, recommendations, and regulations in the U.S.
Due diligence and KYC-specific regulations differ globally, similar principles usually guide them. Resultantly, regardless of the business location, there are traditionally three essential functions from a due diligence procedure to ensure compliance with global standards:
1. Verification
To start the due diligence procedure, an organization should accumulate information about a relevant company or individual they want to make a relationship. They must confirm that the provided information is accurate and truthful.
For an individual, the organization predicts to verify the client’s full name, tax or national identification number, and residential address. For organizations, business office addresses and registration information is also required. To fulfill this process phase, the client must provide a copy of their utility bill, ID card, bank statement, or passport.
2. Processing
Once a company accurately verifies its identity, it should review to see whether any potential issues or risks are linked to doing business with the people involved. During this procedure stage, the organization should reference the verified identity against government databases that uncover criminal records or sanctions.
By thoroughly conducting this process, the organization confirms the risk level and whether it is legal to streamline a transaction with the business or user.
3. Monitoring
After verification and processing, the client can be onboarded. However, the procedure still needs to be completed here. It is because all the given information can change over time so that businesses can constantly investigate key profile data points and transactions.
The Bottomline
The enforcement of Enhanced Due Diligence measures becomes increasingly important for financial institutes to complete their legal obligations regarding KYC regulations. The risks linked with terrorism financing, money laundering, and other illegal activities have provoked regulators to impose significant penalties on companies that fail to comply with the requirements.
Eventually, acquiring Enhanced due diligence AML measures and integrating them into the KYC process is vital for financial institutions to secure themselves from lawsuits, regulatory fines, and reputational damage. By enforcing a comprehensive EDD process, companies can better recognize and manage the risks linked with high-risk clients. It also contributes to the global fight against financial crimes and money laundering.
