Enhanced Due Diligence (EDD)
Enhanced Due Diligence (EDD) provides an additional layer of protection for financial institutions by thoroughly identifying and mitigating risks before they develop into severe regulatory or reputational issues.
For instance, in 2019, Credit Suisse Group AG was accused of fraud and internal control failures related to funds raised for Mozambican government projects, which were subsequently misappropriated by government officials. According to Bloomberg, the bank settled these allegations by paying $475 million in fines to the SEC, the U.S. Department of Justice, and the U.K. Financial Conduct Authority.
This example illustrates that without rigorous EDD measures—especially when dealing with high-risk clients such as politically exposed persons (PEPs) or customers from high-risk jurisdictions. Banks are vulnerable to substantial fines and long-lasting reputational damage.
In this guide, we will explore the enhanced due diligence meaning and how to conduct enhanced due diligence for high risk customers. We also will discuss EDD process, and outline when enhanced due diligence is required.
What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence (EDD) is an advanced, risk-based process designed to provide a deeper investigation into high-risk customers or transactions beyond the standard checks carried out under Customer Due Diligence (CDD) process.
Unlike basic due diligence, EDD involves collecting extensive information on a customer’s identity, beneficial ownership, and source of funds, as well as continuously monitoring their activities for any unusual patterns.
In practice, Companies are required to implement Enhanced Due Diligence (EDD) procedures when conducting business with high risk individuals and businesses.
Who Are High-Risk Customers?
High-risk customers are individuals or entities that present an increased likelihood of being involved in financial crimes such as money laundering, terrorist financing, fraud, or corruption. Financial institutions and businesses must apply Enhanced Due Diligence (EDD) to these customers to mitigate risks and comply with AML regulations.
- Politically Exposed Persons (PEPs) – Government officials, diplomats, military leaders, central bank executives, and their associates.
- Customers from High-Risk Jurisdictions – Individuals or entities from FATF-blacklisted or sanctioned countries.
- High-Net-Worth Individuals (HNWIs) – Wealthy individuals with complex financial structures and offshore accounts.
- Customers with Adverse Media Reports – Those linked to fraud, corruption, or financial crimes in news or media sources.
- Cryptocurrency & Virtual Asset Users – Individuals or businesses dealing with digital assets, often targeted for illicit activities.
- Shell Companies & Anonymous Entities – Businesses with unclear ownership, complex structures, or offshore registrations.
- Cash-Intensive Businesses – Sectors like gambling, real estate, car dealerships, and luxury goods dealing in large cash transactions.
- Frequent Cross-Border Transactions – Individuals or companies with significant international financial flows, especially involving tax havens.
- High-Risk Industry Professionals – Those in gambling, foreign exchange trading, and money service businesses.
- Customers with Unverified or Inconsistent Information – Individuals providing false or incomplete KYC details.
By employing Enhanced Due Diligence (EDD), organisations not only safeguard their reputation but also address any red flags that might emerge during the business relationship. The EDD process typically involves
- Thorough background investigations
- In-depth analysis of beneficial ownership structures
- Detailed verification of the source of funds and wealth
- Official records like business registration, statemen ts, and other documentation
- Continuous monitoring of transactions
Enhanced Due Diligence (EDD) is an advanced, risk-based process that goes well beyond standard Customer Due Diligence (CDD). While CDD is the baseline check for verifying identities and establishing business relationships, EDD is applied when the risk profile of a customer or transaction is higher than normal.
What is Customer Due Diligence (CDD)?
Customer Due Diligence (CDD) is a fundamental process used by financial institutions and other regulated entities to verify and understand the identity of their customers and assess their risk profile when establishing a business relationship. It serves as the first line of defence against money laundering, fraud, and terrorist financing.
For example, when a bank or trading platform onboard a new client, they typically check basic identification—such as a passport—to ensure the customer is who they claim to be. This process includes gathering essential details (name, address, date of birth) and performing a risk assessment based on standard criteria.
Enhanced Due Diligence (EDD), on the other hand, is applied when the initial risk assessment indicates that a customer poses a higher risk—for instance, due to complex ownership structures, links to high-risk jurisdictions, or politically exposed person (PEP) status. In these cases, beyond the standard checks, additional information is required.
In essence, while CDD establishes a baseline understanding of the customer, EDD takes it further by digging deeper into high-risk profiles, ensuring that any potential financial crime risks are thoroughly mitigated.
| Key Difference | Customer Due Diligence (CDD) | Enhanced Due Diligence (EDD) |
|---|---|---|
| Depth of Scrutiny | Basic identity verification and risk profiling. | Deeper investigation into a customer's background. |
| Documentation | Collects standard documents such as passports or national IDs. | Requires additional documentation, such as corporate records, detailed financial statements. |
| Screening Frequency | Often a one-off process conducted during onboarding. | Involves ongoing, continuous monitoring to capture any changes in risk over time. |
Read more: Difference Between CDD and EDD
How to Conduct Enhanced Due Diligence (EDD)
Step 1: Risk-Based Approach
Begin by evaluating each customer or transaction to determine if they fall into a high-risk category. Factors to consider include geography, industry, political exposure, and transaction patterns.
Categorise customers into low, medium, or high risk, so that only those flagged as high risk proceed to the EDD process. This assessment should consider:
- Industry Sector: Certain industries, such as gambling, cryptocurrency, and real estate, pose higher risks for financial crimes.
- Geographic Location: Transactions involving high-risk jurisdictions (identified by FATF or sanctions lists) require closer scrutiny.
- Transaction Size & Frequency: Unusual transaction amounts, frequent transfers, or rapid movement of funds may indicate potential risk.
- Customer Profile & Behaviour: Unusual or inconsistent activities, changes in beneficial ownership, or lack of transparency in business structures can be red flags.
A risk-based approach helps financial institutions and businesses focus their resources on high-risk entities while streamlining onboarding for lower-risk customers.
Step 2: Customer Identification & Verification
Once a customer is classified as high-risk, enhanced identity verification procedures must be conducted.
- Collection of additional identification documents, such as secondary government-issued IDs, biometric verification, or multiple forms of proof of address.
- Identifying high-risk customers by cross-checking their names with global watchlists, including sanctions lists, PEP databases, regulatory warnings, or criminal records.
Step 3: Conduct In-Depth Background Checks
A deeper investigation is required to assess potential risks associated with high-risk customers. This includes:
- PEP Screening: Screening against global databases to identify politically exposed persons (PEPs) who hold prominent public positions with increased corruption risks.
- Sanctions Screening: Cross-referencing against OFAC, EU, UK, UN, and other global sanction lists.
- Watchlist Screening: Checking for inclusion in regulatory, law enforcement, and financial crime watchlists.
- Adverse Media Searches: Reviewing negative media reports to identify past involvement in fraud, money laundering, or other illicit activities.
This thorough background check ensures businesses understand who they are dealing with before entering a financial relationship.
Step 4: Analyze Source of Funds & UBOs
For high-risk customers, companies must obtain additional financial and legal documentation to verify the legitimacy of their funds and identify key stakeholders. Such as
Personal Customers:
- Bank statements
- Tax returns
- Investment portfolios
Businesses & Legal Entities:
- Official corporate records from company management
- Registration documents from the local Registrar of Companies
- Articles of incorporation, partnership agreements, business certificates
- Names and locations of customers and suppliers
- Banking information and relationships with financial institutions
- Identity of board members and beneficiaries
By collecting and verifying these details, businesses can trace the origin of funds and prevent illicit financial activities.
Step 5: Ongoing AML Monitoring
EDD is not a one-time process—it requires continuous risk assessment through ongoing transaction monitoring.
- Real-time transaction monitoring: Automated tools can detect anomalies, such as unusual transaction patterns, large fund transfers, or rapid cash movement across jurisdictions.
- Periodic Risk Reviews: High-risk customers must be reassessed periodically to ensure their risk profile remains updated.
- Trigger-Based Reviews: Re-evaluate risk status when key events occur, such as a sudden increase in transaction volume, legal disputes, or updated adverse media reports.
When Should EDD be applied?
The Financial Action Task Force (FATF) mandates that businesses and financial institutions integrate Customer Due Diligence (CDD) into their Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) frameworks. This is detailed in Recommendation 10 of the FATF’s 40 Recommendations, which outlines when Enhanced Due Diligence (EDD) should be applied.
EDD is Required in the Following Situations:
- Establishing a New Business Relationship: When onboarding a customer, especially if they are from a high-risk jurisdiction or industry.
- Suspicious Transactions: If a transaction appears unusual or raises red flags for potential money laundering or terrorist financing (ML/TF).
- Unverified or Inconsistent Documentation: When a customer’s identity documents seem fraudulent, incomplete, or unreliable.
- High-Risk Individuals and Entities: Includes Politically Exposed Persons (PEPs), entities from sanctioned jurisdictions, or businesses with opaque ownership structures.
The Importance of Enhanced Due Diligence (EDD)
Enhanced Due Diligence (EDD) is crucial for several key reasons:
Mitigating Financial Crime Risks: EDD helps uncover potential money laundering, fraud, or terrorist financing activities by diving deeper into a high-risk customer's background. By verifying the source of funds, beneficial ownership, and detailed financial history, organisations can detect illicit activities that standard checks might miss.
Ensuring Regulatory Compliance: With strict anti-money laundering (AML) and counter-terrorism financing (CTF) regulations in place globally, EDD enables organisations to meet these regulatory requirements. A robust EDD process can help avoid hefty fines, legal repercussions, and operational disruptions.
Effective Risk Management: EDD allows for a more accurate risk assessment of customers by assigning higher scrutiny to those with complex financial profiles or from high-risk regions. This targeted approach ensures that resources are allocated efficiently and that risk is continuously monitored over time.
Protecting Organisational Reputation: Implementing thorough EDD procedures demonstrates an organisation’s commitment to transparency and security. This not only builds trust with customers and stakeholders but also safeguards the institution’s reputation by preventing associations with fraudulent or high-risk activities.
Ongoing Monitoring and Adaptability: Since risk factors can evolve over time, EDD is an ongoing process that involves continuous monitoring. This ensures that any changes in a customer’s behaviour or risk profile are promptly detected, allowing for timely interventions.
Enhanced Due Diligence (EDD) AML Requirements
Financial institutions are required to adhere to rigorous record-keeping and verification standards under Customer Due Diligence (CDD) regulations. Firms must retain all relevant customer documentation—such as government-issued IDs (driver's licenses, passports, birth certificates) and business records—for at least five years. This comprehensive record retention enables regulators to reconstruct transactions, including specific details like monetary amounts and currency types, upon request.
When CDD processes uncover suspicion or provide reasonable grounds to believe a customer may be involved in criminal activities, firms are obligated to promptly submit a Suspicious Activity Report (SAR) to the relevant Financial Intelligence Unit (FIU).
Regulatory obligations differ by jurisdiction, so organizations must verify and comply with local requirements. Although adverse media screening is not a mandated element of EDD, it serves as a potent tool for identifying links to money laundering, financial fraud, drug or human trafficking, organized crime, terrorism, and other illicit activities.
For example, in EU, under Article 18 of the Fourth Anti-Money Laundering Directive (4AMLD), businesses in designated high-risk third countries must implement enhanced due diligence. Similarly, Politically Exposed Persons (PEPs) and their close associates or family members are subject to heightened scrutiny.
Furthermore, it is essential for firms in all regions to stay updated with evolving AML sanctions and to conduct regular screenings against watchlists. Industries that are especially vulnerable—such as gambling—often face additional EDD requirements.
Enhanced Due Diligence Checklist
Below is a streamlined enhanced due diligence checklist to quickly evaluate your EDD program’s readiness:
- Assess Your Customer Risk Profile: Gain a clear understanding of each customer's risk level.
- Gather Supplementary Information: Collect additional data when standard checks are insufficient.
- Perform In-Depth Background Checks and Monitor Transactions: Conduct comprehensive screenings and continuously review transaction patterns.
- Organize and Secure Data: Ensure all information is stored securely and in compliance with regulatory standards.
- Maintain Regulator-Accessible Records: Keep detailed records readily available for regulatory review.
At Binderr, our KYC enhanced due diligence solutions are approved by both local and international regulators. We are committed to upholding KYC/AML compliance and alleviating the compliance burden for our clients. For more information on our solutions, please contact our experts.
Bottom Line
Enhanced Due Diligence (EDD) is a critical component of any robust compliance program, especially for businesses operating in high-risk industries or dealing with high-risk clients. By implementing EDD procedures, organizations can effectively mitigate risks associated with money laundering, terrorist financing, and other financial crimes. However, the complexity and volume of data involved in EDD can make compliance a daunting and time-consuming task.
This is where Binderr comes in. Binderr revolutionizes the compliance process by leveraging AI-powered AML screening to simplify and enhance due diligence. Here are features that automate your Enhanced Due Diligence process
- KYC and ID Verification: Binderr automates the Know Your Customer (KYC) process, ensuring accurate and efficient identity verification. This helps businesses confirm the legitimacy of their clients while reducing manual effort and errors.
- PEP Screening: The platform identifies Politically Exposed Persons (PEPs), their family members, and close associates, enabling businesses to assess and manage the higher risks associated with these individuals.
- Sanction Screening: Binderr cross-references global sanctions lists in real-time, ensuring that your business does not engage with individuals or entities subject to international sanctions or embargoes.
- Watchlist Screening: The tool screens against global watchlists to flag high-risk individuals or organizations, helping you avoid associations with those involved in financial crimes or other illicit activities.
- Adverse Media Screening: Binderr scans news and media sources for negative information about clients or entities, providing insights into potential reputational or financial risks.
- Ownership Structure Mapping: The platform simplifies the process of unraveling complex ownership structures, making it easier to identify hidden relationships and potential risks.
- UBO Verification: Binderr helps verify Ultimate Beneficial Owners (UBOs), ensuring transparency and compliance with regulations that require the identification of individuals who ultimately own or control a business.
- Risk Assessment: Using advanced algorithms, Binderr evaluates the risk level of clients or entities based on various factors, enabling businesses to make informed decisions and prioritize high-risk cases.
