Enhanced due diligence

Enhanced due diligence, or EDD, is a deeper level of customer review used when a person, business or transaction presents elevated financial-crime risk. It supplements standard customer due diligence with additional checks, evidence and ongoing monitoring.

Financial institutions and other regulated firms use EDD under anti-money-laundering and counter-terrorist-financing rules. Customer due diligence, often called CDD or know your customer, establishes who a customer is and assesses their baseline risk; EDD applies where that risk is higher.

EDD is risk-based, not a separate identity-verification method. It may require stronger evidence of identity, but it also examines why the customer needs the relationship, where their money comes from and whether their activity is consistent with their stated profile.

When EDD is used

Requirements vary by jurisdiction and sector, but firms commonly apply EDD to politically exposed persons, or PEPs, their family members and close associates; customers in higher-risk countries; complex ownership structures; and unusual or high-value transactions. A PEP is someone entrusted with a prominent public function, and is not automatically suspected of wrongdoing.

• Identify and verify the customer and, for an organization, its beneficial owners, meaning the people who ultimately own or control it.
• Obtain additional information about the purpose and intended nature of the relationship.
• Establish source of funds and, where appropriate, source of wealth. Source of funds concerns the money used in a particular transaction; source of wealth concerns how the customer acquired their overall assets.
• Seek senior management approval before establishing or continuing certain higher-risk relationships.
• Apply enhanced, ongoing monitoring and investigate activity that does not fit the customer profile.

What EDD does not mean

EDD does not require a firm to reject every higher-risk customer. It requires proportionate controls and documented decisions. If a firm cannot complete the necessary checks or resolve material concerns, applicable law or its own risk policy may require it to decline, restrict or end the relationship and consider whether a suspicious activity report is required.

US and EU context

In the United States, banks and other covered businesses apply risk-based customer due diligence under Bank Secrecy Act rules and related sanctions and anti-money-laundering obligations. In the European Union, EDD is expressly addressed in EU anti-money-laundering rules, particularly for specified higher-risk situations. In both systems, the practical scope of review depends on the customer's risk and the firm's regulated obligations.

Go deeper: Enhanced Due Diligence: What Triggers It and What It Involves and Simplified Due Diligence: When Lighter Checks Are Allowed.