Enhanced due diligence (EDD) is a comprehensive and detailed review process undertaken by organizations to better assess the risk associated with potential business engagements, especially when dealing with high-risk individuals or entities.
This process goes beyond the standard due diligence procedures to provide a deeper understanding of the potential risks involved in a business relationship, ensuring regulatory compliance and safeguarding against involvement in illicit activities.
What is the purpose of enhanced due diligence in a business context?
The primary purpose of enhanced due diligence is to mitigate risks by conducting a thorough investigation into the background, financial activities, and reputation of prospective clients or partners. This is particularly crucial for preventing money laundering, combating financing terrorist organizations, and other financial criminal activity.
EDD serves as a safeguard, ensuring that businesses comply with legal and regulatory requirements, such as those mandated by the financial action task force (FATF), and helps maintain the integrity of the financial system.
Are there any industry-specific considerations for enhanced due diligence?
Different industries may have specific considerations for enhanced due diligence based on their risk profiles and regulatory environments. For instance, financial institutions require a high level of EDD due to the higher risk of money laundering and terrorist financing.
Similarly, the defense industry must consider export controls and sanctions, while the pharmaceutical sector must ensure compliance with healthcare regulations. Each industry must tailor its EDD processes to address its unique challenges and risks.
How does enhanced due diligence differ from standard due diligence?
While standard due diligence involves basic checks when verifying the identity and credibility of a business or individual, enhanced due diligence delves deeper, analyzing the nature of the business relationship, source of funds, geographical location, political exposure, and other risk factors.
EDD requires additional information and a more meticulous approach to understand the full scope of potential insecurities associated with higher risk clients or transactions.
What’s the difference between enhanced due diligence and customer due diligence?
While customer due diligence (CDD) establishes the groundwork for risk assessment, enhanced due diligence builds upon it by introducing additional measures to achieve a more comprehensive risk-based approach to understanding high-risk customers.
The primary difference between CDD and EDD lies in their scope of application. CDD is a standard practice applied to all customers, while EDD is specifically reserved for high-risk customers who warrant additional scrutiny.
What are the key components of an enhanced due diligence process?
The key components of an enhanced due diligence process typically include identity verification, background checks, assessment of business activities, evaluation of the source of funds, scrutiny of any adverse media, suspicious activity, or public information such as watchlists, understanding the purpose and intended nature of the business relationship, and ongoing monitoring.
EDD also often involves a review of the client's compliance standards and practices.
See also: Stay Ahead of Changing Regulations With These 3 Compliance Strategies
When is enhanced due diligence required?
Enhanced due diligence is required when dealing with high-risk customers or clients, such as those with significant public exposure (politically exposed persons or PEPs), those from countries and jurisdictions with high levels of corruption or inadequate anti-money laundering, and know your customer (KYC) regulations, and those involved in industries prone to financial crimes.
Regulatory frameworks often dictate specific scenarios where EDD must be implemented.
See also: What is anti-money laundering?
What are potential legal or compliance issues related to inadequate enhanced due diligence?
Inadequate enhanced due diligence can result in severe legal and compliance issues, including hefty fines, sanctions, and reputational damage. Companies may inadvertently become involved in money laundering, terrorist financing, or other illegal activities. Neglecting EDD can also lead to violations of anti-bribery and corruption laws, such as the foreign corrupt practices act (FCPA) or the UK bribery act.
See also: Compliance challenges companies face when growing globally
What technologies can improve the enhanced due diligence process?
Technological solutions such as artificial intelligence, machine learning, and data analytics can greatly improve the enhanced due diligence process by automating data collection, analysis, and monitoring. These technologies can help identify patterns, red flags, and connections that might not be apparent through manual review, leading to more accurate risk assessments.
See also: The Key to Continuous Company Compliance in Today’s Global Landscape
How does Deel ensure enhanced due diligence?
Global hiring, HR, and payroll provider Deel is committed to compliance across 150 countries and serving over 20,000 customers. Our platform is routinely checked and updated by our team of over 200 in-house compliance experts to ensure responsible hiring, payment, and management of people.
We conduct an enhanced due diligence procedure to ensure that both parties operate in a permissible industry and geography. The process includes KYC checks, screening by our payments and anti-fraud teams, and industry-leading third-party technologies to screen transactions and beneficiaries against international sanction and anti-fraud lists.
Our approved industry and country lists are reviewed and approved by external counsel and our banking and payment platform partners. We actively collaborate with regulators and routinely review our checks and refresh our due diligence on customers to adjust our approach if needed, ensuring the safety of our customers, partners, and their teams.
Learn more: How Deel Runs Customer Checks
