How to Use EDD Requirements to Mitigate Risk and Ensure Compliance?

Do you ever wonder how financial institutions screen high-risk customers and how they continue to be compliant with regulators? Managing risk is all about enhanced due diligence, or EDD. As one compliance expert said, “EDD requirements aren’t just checks. They are an invaluable risk management tool when applied correctly.” Additional requirements for EDD include setting more controls to be placed during onboarding or when doing business with a high-risk customer.  Regulators have expected banks and other financial institutions to identify PEPs, non-resident customers, cash-intensive industries, and those from sanctioned countries. 

Increased inspection of these clients reduces the possibility of financial crimes such as financing terrorism and money laundering. This article is going to explain the process of EDD and how financial institutions can use it as a weapon to reduce risks and comply with regulations.

What are EDD Requirements?

EDD requirements are specific rules that banks have to go through. They help filter customers who may have money hidden or aid criminals. Banks are bound to carry out more comprehensive due diligence, which is often referred to as EDD, on risky clients. This includes procuring more ID proofs and tracing the source of money the client holds. In 2023, global authorities seized over $1.5 billion linked to money laundering activities. The EDD and AML EDD requirements of the banks fulfill the enhanced due diligence for AML. It consequently helps avoid money laundering and funds for terrorists.

Bonus: As the financial risk assessment solution provider, our solutions can be developed to make the Enhanced Due Diligence process less complicated for all sizes of institutes.

How to Identify High-Risk Customers?

Some signs exhibit that a customer needs more checking. Banks look at whether the client resides abroad. They check if the client holds an extremely important position or runs a cash-based business. They also see if the person comes from a place with high crime and terrorism issues. According to the Financial Action Task Force, in 2023, nearly 60% of countries lacked adequate measures to combat money laundering and financing for terrorists. This demands thorough checks. Based on EDD policies, banks cross-check names against sanctioned-person lists. This helps a bank identify high-risk clients and render adequate enhanced due diligence through the EDD compliance process.

Steps to Perform Enhanced Due Diligence

Here are some checks to perform EDD:

  • Once a high-risk customer is identified, banks carry out further screening.
  • They may solicit additional IDs or paper to confirm the address and the source of employment
  • References or inducers may be demanded.   
  • The outcome of all investigations shall be recorded in line with EDD processes   
  • Proper supervision prevents financial crimes.

Effective Monitoring of High-Risk Relationships

A risky client is watched closely. Transactions are observed in order to see if they agree with the client’s business and wealth. Such systems help spot unusual activity, and studies in recent years showed that 70 percent of flagged transactions are indeed worthy of further investigation. Staff receives training in this area to become alert to such notifications. Reviews are performed to ensure compliance. Performed as part of EDD policies, regular monitoring helps manage risks from high-risk relationships while supporting AML efforts.

Documentation of EDD Procedures

Banks must retain what they learn from additional verifications. Information related to ID documents and source of wealth verifications is retained. Files reflect that extra due diligence was used since the EDD standards require them. New reports show that over 75 percent of banks have upped their level of due diligence because the rules are more stringent. These files will be proof that the bank adheres to the EDD Compliance requirement during an audit. Banks document the procedures as a means of ensuring compliance with the AML EDD standards. Appropriate documentation optimizes EDD best practices.

Establishing Risk-Based Compliance Policies

Banks must have just policies. Regulations indicate that extra checks depend on the level of risk. Low-risk clients require less checking, while very risky clients get more scrutiny. According to the FATF 2023 report, over 90% of financial institutions worldwide reported EDD measures for high-risk clients. The policies dictate what members of staff must do for every category. They ensure that EDD and AML duties are met based on customer risk. Reviews of policies guarantee that EDD is done effectively.

Training on Regulatory Requirements

Staff should know what legal issues and Enhanced Due Diligence requirement for AML are required for compliance with EDD. Regular training makes sure that the rules are followed. Staff will be able to recognize the cautions of suspicious activity. They become aware of EDD procedures and policies. Training aids in the smooth execution of the improvements of due diligence. 75% of financial businesses report enhanced vigilance in their compliance functions in 2023. It refrains the bank and customers from further complications.

Conduct Regular Monitoring

High-risk client checking does not end at account opening. Monitor irregular transactions with regular monitoring. Review to ensure completeness of check documents. Make regular checks to ensure enhanced due diligence safeguards the clients and banking institutions from financial crimes. Statutes hold that laws must be expected under conditions for EDD; indeed, research in 2023 revealed that even the chances of fraud could be reduced by 40% in properly monitored institutions.

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