Customer Due Diligence (CDD) is a vital element of the Know Your Client (KYC) process for financial institutions to detect and deter criminal threats. These steps ensure compliance with Anti-Money Laundering (AML) laws. Criminals are growing sophisticated while deploying several techniques to conceal their proceeds of crimes and escape regulatory checks. If financial institutions lack efficient customer risk assessment, they are more likely to become a safe haven for criminals.
Enhanced Due Diligence (EDD) aids as an additional strategy to identify high-risk customers, accounts, and activities. These checks protect financial institutions from criminal threats. Integrating AI-powered EDD solutions can further improve security against fraudsters. Read on to know more about enhanced due diligence and how Ultimate Beneficial Owners’ (UBOs) identification makes it more reliable.
Customer Identification Programs (CIP) and the Importance of EDD in KYC
Criminals are laundering a considerable amount of money pertaining it be between $800 million and $2 trillion per annum. Considering this significant increase from previous decades, financial institutions need to build efficient crime prevention mechanisms to conceal their systems against fraudulent activities. They help in preparing customer risk profiles by taking the necessary steps to perform identity verification checks in return. Edd in KYC helps assess threats possess of money laundering and other FinCrimes.
CIP counts as the first initiative to perform a risk assessment and enhanced due diligence. Whether it’s an individual or a company, it enables financial institutions to identify the level of criminal threat they possess. Furthermore, they can categorize customers from more to less risky and assist them accordingly. Obtaining necessary information for crime prevention aids as the crucial aspect in enhanced due diligence procedures.
EDD and Customer due diligence in KYC outlines activities that show suspicions associated with a particular bank account holder. Similarly, with clearly defined policies, risk-based approaches, and enhanced due diligence measures, financial institutions can carry out CIPs efficiently. Furthermore, they can implement necessary crime prevention mechanisms while staying put with compliance and reposting suspiciousness to authorities in time.
EDD Specifications in the European Union (EU)’s AMLDs
Considering the increase in FinCrimes, legal authorities are calling on financial institutions to perform enhanced due diligence. In Article 18 of its Fourth Anti-Money Laundering Directive (AMLD), the EU obliges every country falling on the High-Risk Third Countries list to perform EDD. Similarly, threat-possessed customers, as well as Politically Exposed Persons (PEPs), their associates, close friends, and family members, should also be a part of the digital KYC verification process.
The 6AMLD came into force in December 2020 with additional pressure on financial institutions to perform enhanced due diligence. Otherwise, negligence in identifying the flow of illicit funds will expose both customers and organizations to legal penalties. After the Russian-Ukraine 2022 riots, financial institutions are undergoing more strict scrutiny. As per requirements set in 6AMLD, countries should keep their watchlists, sanction records, and other information up-to-date for restricting criminal activities taking place worldwide.
Financial institutions are associated with multiple industries among which some are highly risky such as gambling, cryptocurrency, and trading. In order to secure these affiliated sectors against money laundering threats, they need to perform enhanced due diligence. Furthermore, regulatory bodies have set certain threshold limits for transactions. In case any payment exceeds them, e-KYC verification and EDD mechanisms flag it so that financial institutions can report them to legal authorities.
EDD Measures Put Forth by the Financial Action Task Force (FATF)
FATF, in its 40 Recommendations, highlights the necessity of integrating enhanced due diligence and risk-based approach for financial institutions. These mechanisms come with advanced technologies since digitization took over. With this, financial institutions can easily integrate EDD in KYC and stay put with FATF’s legal requirements. Some of the practical steps for enhanced due diligence include:
- Obtaining identity information from additional sources and global databases for efficient risk assessment.
- Conducting cross-verification across watchlists, PEPs, sanctions, and adverse media.
- Validating UBOs and enhanced due diligence reports to identify criminal intentions.
- Performing authentication for sources of funds, financial activities, and ongoing transaction monitoring.
- Detecting suspicious activities and payments that exceed the threshold limits.
- Preparing reports for criminal activities and submitting them to respective legal authorities.
End Notes
Improving enhanced due diligence mechanisms is becoming more of a norm for financial institutions to counter the spike in FinCrimes. While the regulatory landscape is changing, technologies to perform efficient customer identification are becoming more capable. Implementing AI-powered KYC/AML as a service with EDD enables financial institutions to grow exponentially while safeguarding their operations against money laundering and other criminal threats.
