Banks gather basic information about their clients before developing a business relationship. Enhanced due diligence takes this concept further. Banks use this process to dig deep into clients and transactions that hold enhanced fraud risks.
Researchers say trillions of tainted dollars move through major banks. Criminals use these institutions to hide their work and legitimize their finds. Enhanced due diligence reports make money laundering harder.
What is enhanced due diligence?
Know your customer (KYC) policies allow banks to verify customer identity before beginning a business relationship. Enhanced due diligence policies dig deeper to prevent nefarious activity happening on the bank's watch.
Enhanced due diligence policies are:
- Intensive. Companies must create procedures that are rigorous. You can't create a simple checklist and consider your work done. You must prove that you're doing all you can to root out crime.
- Detailed. Enhanced due diligence reports must outline what you do, when you do it, and why you take the steps you're taking.
- Considered. Your decisions must be reasonable, and you must come to them after doing appropriate research.
Some of your clients don't need to move through enhanced due diligence. But those that share these three enhanced due diligence factors do:
- Identity: Your clients are foreigners, or they work in politics.
- Geography: Your customers come from countries without deep financial regulations, or their home countries are known for corruption or sanctions.
- Business: The clients operate a cash-only business.
How is enhanced due diligence used?
More than 70 percent of customers trust their banks to keep their best interests in mind. Enhanced due diligence helps banks maintain their good reputation.
Create good policies and enforce them properly, and you will keep dirty money from flowing into and out of your bank. Your legitimate customers will know they are working with a bank they can trust.
Good policies can also keep you from paying steep fraud fines. You can prove compliance, and you’ll stop problems before they start.
How to conduct enhanced due diligence
To protect your bank and your customers, you must create and define appropriate enhanced due diligence policies.
Most companies take these four steps:
- Identify. How will you determine if a potential client is risky? How can you separate benign businesses from dangerous enterprises? Create your checklist and document it.
- Define. What factors will you use to dig deep into a potential risky client? Create a questionnaire that includes both basic and in-depth information you can use in your research. Don't forget to include data from third parties if it seems valuable.
- Visit. Some clients merit an on-site inspection. If you can't verify documents, for example, a visit to the business could be very helpful.
- Track. Look over a customer's transaction history and determine why each item took place and what it was used for.
- Monitor. Review your datasets periodically. Look over transactions moving through your bank, and change your policies as needed.
Three best practice tips to follow include:
- Do appropriate research. Understand how much data you'll need from your clients to assess their risk. Don't ask for more than you need, but don't limit your investigation due to fear of overreach.
- Create a culture of compliance. Ensure that your staff understands that you are performing enhanced due diligence checks on clients that pose dangers to your company.
- Review and retrain. Compliance can't be ignored. Perform periodic staff training, and review your policies often to ensure that everything is working properly.
At Okta, we work hard to balance security and customer access. Watch this video to find out how to balance customer identity issues.
Global Banks Define U.S. Crackdowns by Serving Oligarchs, Criminals, and Terrorists. (September 2020). International Consortium of Investigative Journalists.;
Survey: Consumers Trust Banks More Than the Federal Government. (July 2021). Deposit Accounts.