Enhanced Due Diligence (EDD) is a critical process in financial and business transactions, designed to assess and manage high-risk customers, transactions, and industries. Enhanced Due Diligence involves more comprehensive investigation of an entity’s financial background, business activities, and risk factors.
EDD is mandatory in situations where there is an increased risk of money laundering, fraud, corruption, or other forms of financial crime. EDD and its implementations are rolled out to avoid any risk and to align with AML regulations.
In this article, we will explore how Enhanced Due Diligence works, when it is required, and its key components.
Enhanced Due Diligence is Usually Required For
EDD is not required for every customer or transaction. Instead, it is typically applied in situations where the risk level is higher than usual. Some key areas where EDD is required include:
1. High-Risk Customers
Specific persons or enterprises are deemed to be higher-risk due to their financial behaviour, business nature, or political exposure. These include:
✔ Politically Exposed Persons (PEPs) – Government officials and politicians, as well as members of their families.
✔ Customers of High-Risk Countries — Countries with weak AML regulations or high levels of corruption.
✔ Enterprises operating in High Risk Industries – (Gambling, Cryptocurrency, Shell companies, Arms dealing)
2. Large or Unusual Transactions
EDD is required for:
- Country and financial institution specific transaction limit.
- Unusual patterns of large deposits or withdrawals.
- Unexpected deviations in transaction patterns that do not correlate with customer history.
3. Cross-Border Transactions
When money is transferred between countries, especially those with weak AML regulations, additional scrutiny is needed. EDD ensures that the transaction is legitimate and does not involve money laundering or fraud.
4. High-Risk Business Relationships
Customers who refuse to provide clear information about their business operations.
Companies with complex ownership structures, which could be used to hide illicit funds.
Businesses that deal with large amounts of cash transactions, such as casinos or real estate firms.
Enhanced Due Diligence Checklist
EDD involves a thorough examination of financial transactions, business operations, and customer identity. Below is a checklist of key steps involved in the EDD process:
1. Customer Identification and Verification
✅ Obtain full identity details: name, address, nationality, and date of birth.
✅ Verify identity using government-issued IDs, passports, or business registration documents.
✅ Cross-check information with global sanction lists and watchlists.
2. Source of Funds and Wealth Analysis
✅ Investigate where the customer’s money is coming from.
✅ Request supporting documents such as bank statements, salary slips, or tax returns.
✅ Verify if the source of wealth is legitimate and consistent with the customer’s profile.
3. Business Background and Ownership Check
✅ Examine company structure, shareholders, and beneficiaries.
✅ Identify Ultimate Beneficial Owners (UBOs) to prevent shell company fraud.
✅ Ensure that the business is operating in compliance with regulations.
4. Adverse Media Screening
✅ Check if the customer has been mentioned in negative news reports related to fraud, corruption, or financial crime.
✅ Use global databases to identify any past criminal activity or legal disputes.
5. Monitoring and Ongoing Reviews
✅ Conduct continuous transaction monitoring to detect suspicious activities.
✅ Schedule periodic risk assessments for high-risk customers.
✅ Maintain updated records and compliance reports.
These steps help financial institutions reduce risks and ensure they comply with international AML regulations.
What is Enhanced Due Diligence (EDD) Example?
To better understand EDD, let’s look at a real-world scenario:
Example: A High-Risk Business Transaction
📌 A bank receives a request from a new customer who wants to open a business account for a cryptocurrency trading company based in a high-risk country.
📌 The bank initiates EDD due to the high-risk nature of the business and country.
📌 The bank asks for:
- The customer’s ID and business registration documents.
- Details of Ultimate Beneficial Owners (UBOs).
- A detailed business plan and financial records.
- Proof of source of funds.
📌 During background checks, the bank discovers that one of the shareholders was previously investigated for financial fraud.
📌 As a result, the bank declines the account request, preventing potential financial crime.
EDD helps banks and businesses make informed decisions and prevent money laundering and fraud risks.
Which of These is NOT the Key Area of Enhanced Due Diligence?
Many aspects are involved in EDD, but not everything qualifies as a key area. The main areas of EDD include:
- Identity verification
- Risk assessment
- Source of funds verification
- Ongoing monitoring
However, customer satisfaction surveys or general marketing research are NOT part of Enhanced Due Diligence. The goal of EDD is risk assessment and fraud prevention, not improving customer service.
“Enhanced Due Diligence Helps a Branch in…”
EDD is a key component that enables the financial institutions and companies to comply with the law and protects them from any frauds. Here’s how:
✔ Anti-money Laundering and Fraud Prevention – By performing in-depth verification, identities can detect suspicious activities before they pose a risk. Preventing Financial Crime By Early Detection Of Fraudulent Transactions
✔ Ensuring Regulatory Compliance — EDD compliance helps you remain in accordance with both AMLs( anti-money laundering) and KYC( know your customers) regulations. Not doing so can result in expensive fines and reputational harm.
✔ Mitigating Business Risks — Financial institutions and companies transacting with high-risk customers can save itself from the potential legal consequences if proper due diligence is completed.
✔ Building Trust and Safety – Banks and businesses enforce strict security measures to create a safer environment for the real customers.
✔ Identifying Politically Exposed Persons (PEPs) – Enhanced Due diligence helps institutions detect and identify PEPs that may be the target of influence or may be involved in corruption.
✔ Ensuring Transparent Transactions – Financial Institutions can manage the verification process thoroughly, thus making sure that every transaction you do is in-line with the law and transparent.
This is why it is essential to implement EDD as a tool to protect financial institutions from legal, reputational, and operational risk.
also read : – LexiQuest: Daily Word Challenge – Discover your Vocabulary Power
Last Word on Enhanced Due Diligence (EDD)
Businesses and financial institutions use Enhanced Due Diligence (EDD) as a key risk management strategy when engaging with high-risk customers. It provides compliance with international standards for AML, minimizing risks caused by money laundering, fraud, and corruption.
A platform like Kubera uses an extensive checklist to verify customers, looks at the source of funds and provides ongoing monitoring to ensure business owners are protected against illegal activity.
EDD is not just about following regulations —it’s about creating a safer financial world. Whether you are a bank, business owner, or financial service provider, EDD can safeguard your business, comply with the regulations, and create a dependable atmosphere for clients.