Have you heard the term' due diligence' before? Enhanced Due Diligence (EDD) is a different Know Your Customer (KYC) form that prevents financial crime and ensures your business complies with rules and regulations.  

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Traditional KYC processes aim to identify high-risk individuals or entities, but businesses require EDD when the risk level is higher and needs a more thorough investigation. Conversely, enterprises implement EDD to provide a more comprehensive and in-depth assessment. EDD KYC dives deep into a customer's background, including their source of wealth and business activities, and finds high-risk jurisdictions.

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This blog post will discuss EDD KYC, why it's essential for businesses, and how to implement it effectively. We'll also explore the benefits and strategies for avoiding risks.

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What Is Enhanced Due Diligence (EDD)?

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Enhanced Due Diligence (EDD) is the next or advanced level of risk assessment process to check high-level customers or transactions. This process is the next level of KYC (Know Your Customers) and checks everything in detail, including the source of wealth, business activities, and potential links to high-risk jurisdictions.

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Customer Due Diligence (CDD) is unlike EDD, which only checks basic information. EDD is crucial to preventing unlawful activities and helping businesses comply with regulatory requirements, protect their reputations, and minimize financial losses.

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What Are The Key Procedures Of EDD?

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Businesses must follow several procedures to implement EDD to identify and assess high-risk customers and transactions.

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Collect Customer Information

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• Gather Detailed Information: Collect the basic details, including their identity, address, occupation, and business activities. AiPrise leverages over 100 data sources to efficiently collect and verify this information.
• Identify Associated Persons: Find out if there are any associated persons, such as family members, business partners, or beneficial owners, who may be involved in the transaction.

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Identifying Beneficial Owners

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• Determine Ownership: Check the individual or entity benefiting from the customer's business activities.
• Verify Beneficial Ownership: Conduct due diligence to verify the identity and legitimacy of the beneficial owner.

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Verifying The Source Of Funds

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• Document Fund Sources: Get the source of funds that is used in the transaction.
• Assess Source Credibility: Evaluate the documentation's credibility and investigate suspicious or unusual circumstances. AiPrise's advanced technologies help conduct these thorough evaluations more effectively.

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Conducting Enhanced Identity Checks

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• Perform In-Depth Background Checks: Conduct thorough background checks to verify the customer's identity, including criminal records, credit history, and media reports.
• Assess Risk Factors: Identify customer risk factors, such as involvement in high-risk jurisdictions or industries.
• Monitor Ongoing Activity: It is vital to monitor the customer's activity to detect suspicious behavior or changes in the risk profile.

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Now that we've laid the groundwork, let's look at who qualifies as high-risk customers.

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Identifying High-Risk Customers

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Understanding high-risk customers is part of Enhanced Due Diligence (EDD) procedures. AiPrise can help identify high-risk customers by leveraging various global data sources and advanced analytics. These high-risk customers may be people in the public or companies. Let's look at them with some examples.

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• Politically Exposed Persons (PEPs): Individuals with important public positions, such as government officials, senior executives in state-owned enterprises, or party leaders. Example: Heads of state, ministers, members of parliament, judges, and senior military officials.
• Companies From High-Risk Jurisdictions: This list includes organizations operating in countries with weak anti-money laundering (AML) and counter-terrorism financing (CTF) regimes.
• Non-Profit Organizations: While most operate legitimately, some, such as charities, foundations, and religious organizations, may misuse the situation due to their charitable nature and less stringent regulatory requirements.
• Shell Companies: A business created to hide ownership or facilitate illicit activities.
• High-Risk Business Activities: Individuals or companies participate in businesses like money laundering, including real estate, casinos, and precious metal dealing.

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Knowing who's high-risk is one thing, but how do you ensure your business complies with EDD requirements?

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Compliance Requirements For Enhanced Due Diligence (EDD)

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Businesses must follow EDD requirements to ensure compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations,

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Documentation And Data Validation

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• Maintain detailed records of all EDD procedures, including customer information, risk assessments, and verification documents.
• Businesses begin with the collection stage but must ensure all data is accurate and up-to-date.
• Establish policies for data retention and destruction to comply with regulatory requirements.

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Regulatory Access And Reporting Requirements

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• Be prepared to provide access to EDD records and cooperate with regulatory agencies.
• Submit the necessary reports to regulatory authorities, such as suspicious activity reports (SARs) and customer due diligence reports (CDDs).
• Constantly monitor regulatory developments and ensure compliance with any new requirements or amendments.

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Ongoing Monitoring And Assessment

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• Regularly review customer risk profiles and update them if necessary.
• Implement systems to detect and report suspicious activity, such as large or unusual transactions. AiPrise's real-time monitoring capabilities can help detect and report suspicious activities promptly.
• Conduct periodic EDD procedure reviews to identify and address any weaknesses or deficiencies.
• Provide staff training to ensure they understand their responsibilities and implement procedures without fail.

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You've mastered the compliance part, so what's next? Here are some of the best strategies for effectively implementing EDD.

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Best Strategies To Implement EDD

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An effective strategy is necessary for Enhanced Due Diligence (EDD). Businesses should consider the following strategies:

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Technology

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• Artificial intelligence (AI), machine learning, and data analytics help you streamline EDD processes and improve accuracy.
• By using technological solutions, you can integrate EDD systems with other business systems, such as customer relationship management (CRM) and compliance software, to facilitate data sharing and automation.
• It is also possible to employ digital identity verification tools to verify customer identities quickly and efficiently.

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Risk-Based Approach

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• Conduct risk assessments to identify high-risk customers and transactions.
• Assess the situation and customize EDD procedures based on the identified risk level. Applying strict measures for higher-risk customers.

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Best Practices For Effective EDD

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• Develop Clear Policies And Procedures: Create procedures and steps, including data collection, verification, and risk assessment.
• Establish A Compliance Committee: To determine the risk, you need a compliance committee responsible for overseeing EDD implementation and addressing issues.
• Conduct Regular Audits: Conduct regular audits and identify areas for improvement.
• Stay Updated On Regulatory Changes: Keep yourself updated with the rules and procedures.

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Now, let's explore how different jurisdictions approach EDD and what it means for your business.

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EDD In Various Jurisdictions

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Enhanced Due Diligence (EDD) is crucial to your business, especially in high-risk scenarios. Different countries have rules that companies should follow to reduce threats like money laundering and fraud.

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Europe: AMLD5 Framework

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In Europe, Enhanced Due Diligence (EDD) is governed by the Fifth Anti-Money Laundering Directive (AMLD5), which outlines specific criteria for higher-risk customers. Under this framework, businesses must conduct EDD for clients involved in high-risk situations, such as those from high-risk third countries or politically exposed persons (PEPs).

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USA: FinCEN Guidance

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In the United States (US), the Financial Crimes Enforcement Network (FinCEN) provides clear guidelines for conducting EDD under the Bank Secrecy Act (BSA). Financial institutions must apply EDD when dealing with high-risk clients, such as foreign financial institutions or non-resident individuals. The focus is ensuring compliance with anti-money laundering (AML) laws to reduce exposure to suspicious activities.

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Global Differences And Common Principles

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The requirements for EDD vary between countries, but some principles remain universal. Identifying and verifying clients' identities and understanding their business relationships are key steps in any EDD KYC process. The documentation requirements may differ by region, but the goal is the same: mitigate the risk of dealing with high-risk entities. AiPrise's global verification services ensure seamless compliance across various jurisdictions.

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Wrapping Up

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Enhanced Due Diligence (EDD) is part of the Know Your Customer (KYC) process and helps you find high-risk customers and transactions. Implement effective EDD procedures that give comprehensive customer information, identify beneficial owners, and verify the source of funds. As regulatory standards evolve, your businesses must stay updated on the latest EDD KYC requirements and use technological advancements to streamline processes. 

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To ensure compliance and mitigate risks, consider partnering with AiPrise, a leading provider of comprehensive EDD solutions. Our technology, expert guidance, and customizable solutions help your businesses meet EDD obligations efficiently and effectively. Want to know more about our procedure and fast solution? Book your demo with AiPrise now. 

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