Fighting Dirty Money With Enhanced Due Diligence
Every year around $2tn in illicit cash flows enter the financial system worldwide, despite the efforts of regulators and financial institutions to stop the financing of terrorists and money laundering. One way to tackle dirty money is through enhanced due diligence (EDD) which is a thorough know your customer (KYC) process that examines transactions that have higher fraud risks.
EDD is generally thought to be more thorough of screening than CDD and can involve more information requests, such as sources of funds and wealth corporate appointments, relationships with other individuals or companies. It often involves more thorough background checks, like media searches, in order to identify any publically available evidence or evidence of reputational proof of criminality or other misconduct that could pose a threat to the bank’s operations.
The regulatory bodies provide guidelines on when EDD should be activated, and this is usually based on the type of customer or transaction, as well as whether the person concerned is a politically exposed person (PEP). However, it is ultimately up to each FI to make a personal judgment call about what triggers EDD in addition to CDD.
It is essential to have policies that clearly state to employees what EDD expects and what it is not. This will help to avoid high-risk scenarios that can lead to hefty fines for fraud. It’s also vital to have a thorough identity verification process which allows you to identify red flags like hidden IP addresses, spoofing technology and fictitious identities.