Adhering to KYC guidelines is critical for financial institutions. Regulatory penalties for non-compliance can reach up to EUR20m in the European Union. In countries, such as Australia, the penalty per violation can go up to a whopping USD1m. Therefore, banks and other financial institutions conduct KYC processes for every customer as part of Customer Due Diligence (CDD). However, if large or high-risk financial transactions are involved, financial institutions need to conduct Enhanced Due Diligence (EDD). EDD goes a step beyond CDD and is far more vigorous in its scrutiny of customers. EDD identifies risks not discovered by CDD.
Factors influencing EDD
Identity of customers
The identity of customers plays a huge role in influencing Enhanced Client Due Diligence. Customers from countries different from the one where the financial institution has been set up are usually placed under the high-risk category. Also, politically exposed persons (PEPs) can be placed under the high-risk category as they could misuse their positions.
Place of residence
The geographical location of customers can be a major deciding factor in the process of EDD. If a customer is from a place that is politically sanctioned, he or she may be placed under the high-risk category. In addition, if a customer is from a place known for having designated terrorist institutions, he or she will be seen as a high-risk customer.
Importance of EDD
Far more extensive than CDD
Enhanced Client Due Diligence, as mentioned earlier, is an advanced form of KYC process, which classifies customers after scrutinising a multitude of information about them. Categories include high risk, low risk, high net worth and low net worth. This process is more efficient than CCD when it comes to identifying potential risks associated with a customer.
Most effective with high-risk and high-net-worth customers
EDD plays an important role in the case of high-risk and high-net-worth customers, especially when the net transaction amount is high. It provides financial institutions extra information on customers, helping the institutions decide whether they should approve the transaction and continue doing business with the customers.
Tough guidelines
EDD encompasses many laws and guidelines which, if followed properly, allow regulators to provide an extra layer of protection against frauds. The guidelines usually require more details about the customer and proofs. All the information gathered can be used to determine risk factors in the future and track customers’ financial activities. Any illegal activity, such as money laundering and suspicious transactions, that customers may be involved in can be reported easily followed by an appropriate action.
Save yourself from being a victim of fraud
Information gathered through the Enhanced Client Due Diligence process can be easily processed by a data analyst to find out if the customer was or is involved in fraudulent activities, such as money laundering. This will help financial institutions take appropriate action on time. EDD can also alert you if the customer is from a politically backed location or areas known for harbouring terrorist organisations by putting them under the high-risk category. This can help financial institutions look closely into the customer’s records and see if the customer is worth taking a risk on.
Device special services
Sometimes the terms and conditions set by financial institutions are not convenient for all their customers. The EDD process provides financial institutions with detailed knowledge about the customers; for instance, their age, CIBIL score, financial stability, etc. With this information, financial institutions can device special services or bend the rules depending on a particular customer. This helps build trust both ways.
Therefore, EDD plays a key role in the security of banks and financial institutions, as the process helps build trust, comply with regulatory norms and prevent fraudulent activities.
