The due diligence processes are important in Anti-Money-Laundering (AML) frameworks used to identify, evaluate, and manage risk linked with customers and their financial conduct. Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are the most vital elements of this framework. Although both aim at preventing illicit financial transactions, they are highly different in their scope of reach, intensity and usability. Conceptualizing the distinction between EDD vs CDD is essential to ensure financial institutions, legal firms, and regulated entities satisfy the requirements of compliance and incur no risks of being exposed to financial crimes.
Customer due diligence (CDD): Knowing about it
Customer Due Diligence can be defined as the usual procedure that the institutions should use to prove the identity of their customers and evaluate the risks which may have a business relation. This prerequisite stage of the CDD procedure entails the gathering and authentication of some basic information including the name, address, date of birth, and identification documents. It also comprises evaluating the purpose as well as nature of business relationship, assessing the low or moderate risk posed by a client and ensuring that the activity of a client is consistently monitored.
The CDD process is mandatory to any new customer before any business transaction can occur. It is usually adequate among clients who are regarded to come with minor risk of financial crime. This minimum of questioning makes sure that the organization is aware of whom it is working with and that the activity of the client is close to the expected behavior. Lack of performing effective customer due diligence can cause occurrence of financial penalties and breach of regulations.
What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence or EDD is a higher form of investigation on high risk customers or the transactions. The EDD process is an expansion of the usual CDD framework, as it needs more extensive data, increased scrutiny as well as monitoring. The red flags that are normally subject to EDD are dealing with high risk businesses, politically exposed persons (PEP), cross border transactions with high risk jurisdiction or unusual behavior.
The EDD compliance aims at increasing information regarding the source of funds, source of wealth, ownership structure and business transactions of the customer. It also entails the process of authentication of documents provided and credibility of activities of the customer with regard to finances. As opposed to CDD, which may be conducted once and periodically reviewed, EDD requires constant tracking, time-sensitive risk analysis and exhaustive documentation of all the steps undertaken during the analysis.
EDD And CDD Why The Core Differences?
The difference between EDD and CDD is mainly in the level and the aim of the checks conducted. CDD is done as a matter of course, and it is applicable towards every customer, but EDD is done only in cases when there is a greater risk of money laundering, financing of terrorism or other financial crimes. CDD offers a primitive idea of the nature of relationship and identity of the client. EDD in comparison to it needs a more detailed insight into the financial history, sources of income and risks, the customer may have.
The EDD procedure is also demanding concerning resources as it goes through various stages of confirmation and authorization. In the case of institutions, this translates to an increase in compliance cost, in terms of a staff requirement, an increase in monitoring systems and audit trail. Although this may sound complex, EDD compliance plays an important role in ensuring compliance with the regulations and preserving the integrity of the financial system.
Law and Statutory Requirements
CDD and EDD are both required by the global standards on AML, by financial regulatory authorities and international organisations. The institutions are required to evaluate the risk profile of each customer and impose due diligence on it accordingly. Low-medium risk clients are usually the ones subject to CDD followed by high-risk situations that entail the implementation of the enhanced due diligence.
Regulatory expectations are obvious: the absence of performing proper EDD at the time when it is compulsory may result in severe consequences, such as a fine, losing a license, or being charged with a legal offense. There is a need to depend on the initial checks alone. Both CDD and EDD compliance require continuous monitoring, as well as the analysis of transactions, and the improvement of profiles of clients.
Incorporating Due Diligence in the Business.
To make due diligence effective, it is necessary that CDD and EDD becomes part and parcel of the core compliance strategy of a company. This implies providing proper internal policies which allow defining the situation when higher level of due diligence should be provided of higher level of imposing responsibilities and properly training all employees. Technology is also important in automation of certain portions of the CDD process, spotting anomalies and data collection and reporting.
An effective due diligence framework will feature a risk scoring dimension, the ability of real-time monitoring, and access to quality sources of data. In this way, establishments will be able to keep abreast with the stipulated regulations thus managing resources effectively. Also, having a clear documentation of all of the EDD processes will keep everyone transparent and will be able to defend all possible audits or regulations check.
The responsibility carried out by the Risk Assessment
The issue of risk assessment is the basis upon which a customer has to be taken through CDD or EDD. This is arrived at by a number of variables such as geographical, transaction scale, nature of business and client behaviour. An efficiently constructed risk assessment model will also automatically detect instances which need an elevated level of diligence and acquire the relevant work processes.
The institutions are required to review their risk models regularly in order to accommodate changes in the regulatory requirements and new threats. By this, we shall ensure that the EDD compliance is kept in line with the international set practices and the organization is able to counter changing risks in advance.
Conclusion
It is important that any organization that is to be regulated in regards to AML get to understand the differences between CDD and EDD. Although Customer Due Diligence is a form of minimum and introduces a level of the identity and risk verification of a customer, Enhanced Due Diligence is a more thorough process and it applies in more risky scenarios. They cannot be used interchangeably, and it is necessary to know when each of them should be used so that the entity can be in compliance with the regulations and be less exposed to financial crime.
An efficient CDD procedure and the willingness to upgrade it to EDD in the absence of a proper response may help an institution to avoid legal, financial, and reputational damage. With the evolution of AML frameworks, it is important that one remains compliant by constantly updating CDD and EDD procedures to deal with the changing nature of challenges that appear to be constantly rising in complexity.
