TL;DR
Enhanced due diligence (EDD) is a rigorous Know Your Customer (KYC) process banks use to investigate high-risk clients — including foreign nationals, politically exposed persons, and cash-only businesses. By identifying risk factors, conducting on-site visits, tracking transactions, and monitoring activity over time, banks can prevent money laundering, maintain customer trust, and demonstrate regulatory compliance. A strong EDD program requires documented policies, a compliance-driven culture, and regular staff retraining.
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.
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. Banks use this process to dig deep into clients and transactions that hold enhanced fraud risks.
Enhanced due diligence (EDD) policies are:
| Characteristic | What It Means |
|---|---|
| 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 do you conduct enhanced due diligence?
To protect your bank and your customers, you must create and define appropriate enhanced due diligence policies.
What are the steps for conducting enhanced due diligence?
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.
What are the best practices for EDD compliance?
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.
Frequently asked questions
What is the difference between standard due diligence and enhanced due diligence?
Standard Know Your Customer (KYC) policies verify a customer's identity before a business relationship begins, while enhanced due diligence (EDD) goes further by conducting rigorous, detailed investigations into clients who present elevated fraud or money laundering risks.
Which clients typically require enhanced due diligence?
Clients who are foreign nationals or politically exposed persons, those from countries with weak financial regulations or known corruption, and businesses that operate on a cash-only basis are the primary candidates for enhanced due diligence (EDD) review.
What makes an enhanced due diligence (EDD) policy effective?
An effective enhanced due diligence (EDD) policy must be intensive (not just a simple checklist), detailed (documenting what steps are taken and why), and considered (based on reasonable, well-researched decisions).
What steps are involved in conducting enhanced due diligence (EDD)?
The process typically involves five steps: identifying risky clients, defining the factors used to investigate them, conducting on-site visits when necessary, tracking transaction history, and periodically monitoring and updating policies.
Why is enhanced due diligence (EDD) important for banks?
EDD helps banks prevent money laundering, maintain the trust of legitimate customers, and avoid steep regulatory fines by demonstrating documented compliance with anti-fraud procedures.
How can banks build a strong culture of enhanced due diligence (EDD) compliance?
Banks should ensure staff understands the purpose of EDD checks, perform periodic training, and regularly review policies to confirm they are functioning as intended.
References
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.
