Enhanced Due Diligence: What It Is and Why Businesses Need?

Enhanced Due Diligence

Enhanced due diligence is the process that companies use for risk-based assessment of the companies before partnering with them. In the business world, the risk of financial crime is forever looming because of the high-risk profiles.  To ensure safety, organizations can request thorough verification of the company structures through business verification procedures to keep their integrity in the global market. According to the study, trillions of money are laundered and circulated annually within the business world. Unfortunately, almost 90% of other illicitly obtained money remains unchecked. That is where the role of EDD comes into play. In this blog, learn how companies around the world prevent the risk of financial losses through the KYB procedure.

What is Enhanced Due Diligence?

Enhanced due diligence is the process that involves a thorough collection of data on potential business partners, company individuals, risk profiles, and reputations. The main goal of enhanced due diligence is to minimize the risks and challenges that businesses have to face to verify another business before onboarding them.  The goal is to reduce the potential negative impact that new business partnerships can have, particularly for businesses with high levels of risk or significant financial assets, as well as those involved in substantial transactions.

Why EDD Is Required?

In the business world, Financial Action Task Force (FATF) is the regualtory authority that is mainly focused on money laundering and other types of financial fraud. KYB procedures are essential for all businesses, and all companies must implement them. This is because the FATF recommends that all organizations pay special attention to the regulations and ensure regulatory compliance. EDD helps companies know whether their potential partners are laundering money or if there is anything that needs to be verified.

For high-risk profiles, corporations must take an advanced level of customer due diligence and ensure Business verification through enhanced due diligence. It is important for the following reasons:

  • Politically exposed persons (PEPs)
  • Businesses operating in tax havens
  • Individuals in sanctions or sanctioned countries
  • Companies that are engaged in large transactions
  • Countries where terrorist organizations operate within their borders
  • Businesses engaged in anonymous transactions
  • Customers that have received payments from unknown third parties

EDD Process and Checklist

Companies are required to perform a number of checklists in order to perform improved due diligence prior to onboarding partner business. These measures set apart the two processes of due diligence:

  • Enhanced due diligence measures the high-risk entities linked to particular clients in order to ascertain their identification and reduce fraudulent activity. With the help of this data, the onboarding company can monitor the partner business’s ongoing operations and disclose what it is doing. Check these documents to make sure the company is legitimately sourced and that there are no illegal activities going on with the partner business.
  • In order to comply with the EDD, businesses compile comprehensive information about themselves, including financial records, transaction histories, registration numbers, licenses, permits, and other pertinent information. They evaluate the owner information of the business and the real source of finance for the enterprise. They must guarantee that every important participant is law-abiding and not engaged in any illegal activity. 
  • For organizations that seek to enhance due diligence, they need to align themselves to incorporating the use of advanced technologies such as, Machine learning to enhance due diligence to consistencies of the digital world to avoid false positives while striving to reach a 100% accuracy.
  • Also, the necessity of establishing a strict protocol for the protection of information leakage is also essential for companies. In order to ensure compliance, audits of the programs have to be done on a regular for instance when the program changes. Finally, the workers should be educated on the importance of protecting data and their privacy.

EDD and Money Laundering

The prevention of money laundering requires that banks conduct EDD to be able to get deeper into the life profile of these high risk clients and their transactions. It entails getting additional information, carrying out constant observations, and exercising controls based on risk in order to avoid various risks. This proactive stance assists in identifying the certain most likely unlawful operations prior to they occur and aids in maintaining compliance with the rules and regulations and to protect the financial system from the operations that is unlawful. Ultimately, EDD enhances the integrity of financial operations and protects against financial crime.

Concluding Remarks

All in all, it can be concluded that enhanced due diligence difficult for organizations to deal with money laundering, bribery and corruption, and terrorist financing. However the conventional compliance with the verification systems is a tiresome and costly affair for organizations. In addition to that, it presents a number of risks during the onboarding process, such as false positives. The company will need to use automotive approaches to increase security and optimize workflow in order to overcome these obstacles. These methods consist of automation, predictive analytics, and machine learning. They can guarantee safe onboarding, cut expenses, and assist in detecting possible dangers more quickly.

Felicia Nelson

By Felicia Nelson

I'm a passionate content writer specializing in “technology” which includes, artificial intelligence, machine learning, business, finance, cyber security, crypto, fintech, and data science.


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