Traditional due diligence is no longer enough in a constantly changing and connected world. Criminals nowadays have become smarter in hiding financial crimes like money laundering. Almost $2 trillion in illegal money goes through the global financial system every year.
Such activities are a growing concern for companies and financial institutions. Regulatory pressure is rising, and firms face serious consequences if they miss hidden threats. That is why more organisations are turning to enhanced due diligence (EDD) to protect themselves from high-risk clients and other associated risks.
EDD is a deeper process that looks closely at high-risk customers and transactions. It adds stronger checks to the KYC process. EDD helps firms that want to stop money laundering and terrorist financing need to understand who they are dealing with.
Enhanced due diligence helps find red flags such as money laundering or ties to politically exposed persons (PEPs). Financial institutions, global companies, law firms, and even non-profits are using EDD when dealing with high-risk situations through effective customer risk assessment.
Read on to learn more about enhanced due diligence (EDD) and how to do it.
What Is Enhanced Due Diligence (EDD)?
Enhanced due diligence is simply a deeper form of risk assessment. The EDD process helps companies understand and manage the risks related to high-risk customers or business relationships.
EDD is more than standard due diligence as it collects and analyses more detailed information. It involves extra steps to check and monitor risky customers. These may include
· High-net-worth individuals
· People with complex ownership structures
· Individuals involved in large transactions
Enhanced due diligence helps identify the beneficial owner of an account and understand the purpose of the business relationship. Businesses may also review the source of funds and connections to politically exposed persons.
In simple words, EDD helps businesses and financial institutions detect and prevent financial crimes like money laundering and terrorist financing.
Industries That Commonly Apply Enhanced Due Diligence Procedures
Enhanced due diligence is necessary for the following industries:
- Investment firms and banks that deal with high-net-worth customers or individuals from high-risk countries.
- Large-scale real estate transactions that involve foreign buyers.
- Cryptocurrency platforms that operate in weakly regulated countries.
- People or businesses that deal in high-value luxury goods and arts.
- Money service businesses
- iGaming platforms and casinos
- Investment firms
- Cash-intensive businesses
Comparison Between Enhanced Due Diligence and Standard Due Diligence
Here is a brief comparison between standard due diligence and enhanced due diligence.
| Standard due diligence | Enhanced due diligence |
| · Verifies identity and assesses general risk · Used for low to medium-risk customers · Common in everyday banking and low-value transactions · Requires basic forms and ID documents · Meets minimum compliance requirements · Confirms identity and identifies obvious issues | · Focuses on customer risk assessment to understand and manage high-risk customers or situations · Used for high-risk customers or transactions · Applied for high-value transactions, foreign clients, and politically exposed persons (PEPs) · Requires extensive records, verification documents, and audit trails · Required for higher regulatory scrutiny and full compliance · Uncovers hidden risks and prevents financial crimes |
When Is Enhanced Due Diligence Required?
It is important to understand that customer due diligence and EDD are closely related. There are different levels of due diligence, where EDD comes after CDD.
Customer due diligence is a core requirement for all member countries of the Financial Action Task Force. This obligation is part of domestic anti-money laundering and counter-terrorist financing frameworks.
Enhanced due diligence is necessary in higher-risk situations to provide deeper scrutiny. It becomes important when dealing with individuals or entities from high-risk jurisdictions identified by the FATF.
EDD is not limited to new business relationships. It also applies to occasional transactions when
- There is suspicious activity
- Identity documents are unreliable, or
- The level of risk in an ongoing relationship increases
Here are some scenarios when enhanced due diligence becomes mandatory.
- Customers who are non-residents or based in countries with poor AML/CFT oversight
- Transactions that involve countries subject to international sanctions or known for corruption, terrorism funding, or high levels of criminal activity
- Complex ownership structures, such as legal arrangements used to hold personal assets or companies with bearer shares or nominee shareholders
- Unusual or geographically distant business relationships
- High-risk sectors like private banking, gambling, or arms trading
- Anonymous, non-face-to-face interactions or payments from unknown third parties
- Customers identified as PEPs, their relatives, or close associates
- Clients who submit false or stolen identification documents
- Businesses with large cash flows or operating in cash-intensive industries
The Fourth Anti-Money Laundering Directive defines the need for EDD in the European Union. Article 18 of 4AMLD requires firms to apply EDD to relationships involving countries listed as high-risk third countries. It requires institutions to take a risk-based approach to determine the depth and duration of EDD measures.
What Do Enhanced Due Diligence Procedures Involve?
Enhanced due diligence digs way deeper than traditional customer due diligence. Here is how.
| Deep Identity Verification | Source of Funds and Wealth Checks | Ongoing Monitoring and Reporting | On-site Visits, Media Checks, and Open-Source Intelligence |
| · Multi-layered identity verification of an individual or an entity · Verification of beneficial ownership structures (especially in complex corporate setups) · Use of official government documents, biometric data, and third-party databases | · A deeper investigation of where the customer’s funds come from · Assessing whether the customer’s declared wealth matches their known economic activity · Requesting documentation such as tax returns, employment contracts, sale deeds, or business income statements | · Ongoing review of account activity, transactions, and changes in customer behaviour · Automated transaction monitoring systems and manual reviews · Filing of Suspicious Activity Reports (SARs) when anything unusual arises | · Physical visits to business locations to verify legitimacy · Review of local and international news sources for adverse media · Use of OSINT tools to gather intelligence from social media, company registries, and online databases |
Real-World Examples Where Companies Failed to Perform Enhanced Due Diligence
- HBSC had to pay a massive fine of $1.92 billion because of violating anti-money laundering and sanctions laws. The company failed to monitor $9.4 billion in cash purchases and $670 billion in wire transfers from Mexico.
- 1MDB scandal is another famous example of the lack of enhanced due diligence. Several banks failed to properly verify the source of incoming funds into Malaysian government accounts and private individuals. Proper EDD could have raised flags when billions were moved through fake companies.
How to Implement an Effective EDD Process?
An effective EDD process is possible when you integrate FATF-recommended steps with best operational practices. Here is how.
Build a Risk-Based Approach
A risk-based approach is the backbone of enhanced due diligence measures. The FATF emphasises this as the first and most crucial step for AML (Anti Money Laundering) compliance.
- Start by assessing the customer’s risk level. This includes identifying whether the customer is a PEP, the type of business entity, and geographical risks.
- Employ enhanced due diligence measures for high-risk customers. This may include: Collecting official corporate documents (e.g., articles of incorporation, registration certificates); Verifying ownership structures and the identity of ultimate beneficial owners (UBOs); Examining the source of funds and wealth, and asking for documentation if there are any discrepancies.
Use the Right Tools
The EDD process is highly data-intensive and requires advanced due diligence solutions to manage compliance effectively. Here are some handy platforms to consider.
KYC Platforms: Automated Know Your Customer systems help streamline identity verification and identify high-risk indicators.
Screening Databases: These platforms are helpful for
- Sanctions screening
- Identifying negative news and links to financial crimes
- Ongoing PEP monitoring
Virtual Data Rooms: These are secure document repositories used in due diligence to securely manage and share sensitive documents such as:
- UBO declarations
- Source of funds documentation (e.g., salary slips, inheritance records)
- Transaction histories and internal assessments.
Document Everything: Transparency & Audit Readiness
Proper documentation ensures transparency, traceability, and audit readiness. Financial institutions should consider documenting the following.
· Customer files, such as onboarding steps, EDD questionnaires and responses, and collected identification documents
· Transaction details such as background, purpose, nature, and parties involved.
· Monitoring logs like Ongoing monitoring activities, Adverse media findings, and on-site visit reports.
· Audit trails, which are valuable for regulatory audits and internal investigations.
Whether it is EDD, standard, or commercial due diligence, virtual data rooms are amongst the most trusted data sharing platforms to manage such sensitive processes. VDRs also provide detailed audit trails for internal investigations and regulatory audits.
Enhanced Due Diligence Checklist
The following is a checklist for financial institutions and other concerned businesses to quickly evaluate the readiness of their enhanced due diligence measures.
- Fully understand your customers’ risk profile to identify high-risk customers.
- Get more information whenever necessary to strengthen your risk management process.
- Analyse the source of funds and ultimate beneficial ownership.
- Run detailed background checks and go for ongoing transaction monitoring.
- Keep your data safe and organised as per regulatory requirements.
- Make sure the data is available for regulators.
Why Enhanced Due Diligence Pays Off
Enhanced due diligence (EDD) is not only mandatory but also helps identify potential risks for businesses and financial institutions. Firms that conduct enhanced due diligence:
1. Prevents Regulatory Fines
It is not hard to understand that enhanced due diligence helps prevent costly penalties from regulatory authorities. Businesses that comply with FATF and 4AML laws are on the safer side. They can minimise the chances of financial crimes like money laundering.
2. Reduces Fraud and Reputational Risk
EDD helps companies thoroughly assess the customer’s risk profile. This helps identify high-risk customers early and prevent damage. A business that is not associated with financial crimes like terrorism funding and money laundering enjoys a great reputation.
3. Builds Trust with Partners and Investors
Strict regulatory compliance is a sign of strong governance, which increases the company’s credibility. This strengthens business relationships with clients and investors.
Enhanced Due Diligence (EDD)—A Smart Way to Better Risk Management
EDD is an advanced risk assessment process that deeply assesses
- High-risk customers
- Complex financial transactions, and
- Sensitive business relationships
It goes beyond basic identity checks, focuses on an ongoing monitoring strategy, and is important because it:
- Prevents financial crimes like money laundering and terrorist financing
- Reduces fraud and reputational harm
- Builds trust with regulators, partners, and investors
- Ensures compliance with global regulations
Enhanced due diligence (EDD) is a data-sensitive process that requires companies to use tools like virtual data rooms, screening databases and KYC platforms.
FAQs
What are High-Risk Customers?
High-risk customers are those individuals who pose a threat to the company or its operations. These customers can:
· Affect the company’s compliance
· Engage in fraudulent activities
· Cause a cybersecurity breach
Common examples of high-risk customers include PEPs and offshore companies. Customers with complex ownership structures and those from high-risk countries also fall under the category of high-risk customers.
Is Customer Due Diligence Different from Enhanced Due Diligence?
Yes, customer due diligence focuses on basic checks to identify customers and understand their business. EDD goes further with rigorous checks, detailed documentation, risk assessment, and extra scrutiny. This helps prevent money laundering risks, terrorism funding, and identify suspicious business relationships.
How Does the Risk-Based Approach Work in EDD?
Risk-based approach in enhanced due diligence process involves assessing AML risk factors and applying stricter measures based on the customer’s risk level. This includes
· Verifying identity and source of funds
· Ongoing monitoring of transactions and business activity.