Overview of KYC Enhanced Due Diligence Policies
If you are familiar with the term “Know Your Customer”, otherwise referred to as KYC, you might also have heard of “Enhanced Due Diligence”. Both of these concepts are pivotal in the financial and business industries, and it is therefore important to have have a clear understanding of both. KYC is simply the process of gathering information and data in order to verify the identity of clients and make sure that they are not involved with money-laundering or another type of financial crime. KYC Enhanced Due Diligence is a very similar concept – the main difference is greater detail and depth.
KYC Enhanced Due Diligence, or simply EDD, is specifically designed for dealing with high-risk or high-net worth customers and large transactions. Because these customers and transactions pose greater risks to the financial sector, they are heavily regulated and monitored in order to ensure that everything is above board. Companies and financial institutions were first compelled to conduct EDD by the USA PATRIOT Act in 2001, a provision which is still in effect today. The Patriot Act also requires that offshore banking institutions, private banking organisations, and correspondent accounts abide by EDD regulations and laws. There are several characteristics that distinguish regular KYC policies from EDD policies. EDD policies are considered to be “rigorous and robust”, meaning that they require significantly more evidence and detailed information to be collected. The entire process of EDD must be documented in detail, and regulators should be able to have immediate access to the data. Professionals are often hired in order to analyse data that is collected regarding clients, and the reliability of information sources is of utmost importance.
EDD also requires “reasonable assurance” when calculating a KYC risk rating. This means that the professionals responsible for making a decision must have completed all the necessary research steps and exercised professional skill and care in reaching their judgment.
Lastly, EDD also takes into consideration all relevant adverse information. Whether an official document or something posted publicly on the Internet, any information that pertains to money laundering or corruption must be thoroughly considered. When clients or transactions are large enough to warrant EDD, there is no room for leniency and no risks should be taken.
It is important to note that the same standards for regular KYC procedures also apply to EDD. If a company or institution discovers anything suspicious, they must always report it to authorities. Additionally, consistent monitoring is always required, and the use of compliance software is heavily encouraged.