What is Enhanced Due Diligence?
Enhanced Due Diligence (EDD) is used by regulatory authorities in the United States and others that require financial institutions to take additional steps of examination and caution to identify their customers and confirm that their activities and funds are legitimate. Sometimes referred to as “special due diligence”
Enhanced Due Diligence (EDD) was born in the aftermath of the aspersions that were cast on the “Know Your Customer” regulations proposed by the Federal Reserve Board and the Office of the Comptroller of the Currency in 1998. The regulations were withdrawn in the face of opposition by groups who believed they were an invasion on financial privacy. However, financial institutions today accept that Enhanced Due Diligence is necessary if the bank customer is found to be exposed to politics.
Politically Exposed Person
The politically exposed person is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. The terms politically exposed person and Senior Foreign Political Figure are often used interchangeably, particularly in international fora.
By law clients who are PEPs need to be subjected to Enhanced Due Diligence! Enhanced Due Diligence is a more detailed standard required for larger customers and transactions.
Enhanced Due Diligence Globally
The UK Money Laundering 2007 Regulations 2007 also specify that Enhanced Due Diligence must be applied in a number of situations. Two situations have been outlined below:
- If a client has not been physically present for identification purposes one or more additional measures must be taken to enhance due diligence for example by, inter alia, either gathering additional documents, data or information or taking additional steps to verify documents or obtain a confirmatory certificate from a credit or financial institution subject to the money laundering directive; and
- if a business relationship or occasional transaction is to be undertaken with a PEP in which case the business must provide for senior management approval for the relationship to be established, must take adequate measures to establish the source of wealth and funds which are involved, and must conduct enhanced monitoring of any relationship entered into.
Documentary Evidence establishing identity CDD
The following illustrates the different strengths of various forms of documentary evidence used in establishing an identity for CDD, starting with the highest:
- Document issued by a government department or agency or a court( including documents filed at Companies House or Overseas equivalent)
- Documents issued by other public sector bodies or local authorities
- Documents issued by businesses regulated by the Financial Services Authority or Overseas equivalent
- Documents issued by professionals regulated for anti-money laundering purposes by the bodies listed in Schedule 3(Part I) of the 2007 Regulations or Overseas equivalent
- Documents issued by other bodies.
