Nowadays, it becomes essential for firms to search for new clients to succeed and remain competitive. However, it is necessary to check out the history of each incoming client to combat risks like data theft, money laundering, etc. That’s why it is so important for financial firms to follow all current Anti-Money-Laundering (AML) regulations, which include the implementation of detailed Know Your Customer (KYC) checks. The risk of facing regulatory penalties or becoming a victim of fraud decreases dramatically by following a thorough know-your-customer audit. Moreover, banking is a competitive industry that operates rapidly due to the widespread use of modern risk management.
Furthermore, the finance industry is responsible for promoting regulations designed to reduce financial fraud. Since online banking comes with obvious risks, financial firms need to be as focused on customer identification. For this reason, they use Customer Due Diligence (CDD) to confirm the identities of their clients and comply with KYC/AML regulations. However, there are circumstances where standard CDD is insufficient, and banks conduct Enhanced Due Diligence (EDD). Thus, EDD in banking is a KYC verification process that helps them to verify their client’s IDs thoroughly and restrict the hefty fines.
Let’s quickly overview EDD in banking and how they help to combat money laundering.
EDD in Banking – Quick Overview
EDD in banking is a crucial component of the KYC compliance procedure. It includes collecting details to determine who the clients are and identify their risk level for money laundering. EDD requires significantly more client feedback than CDD because it reduces criminal activities.
FATF advises a risk-based approach to EDD in banking, where quantity, variety, and level of checking increase when the business is at higher risk of fraud.
Furthermore, FATF suggests the following procedures for EDD in banking;
- Collecting more identifiable data from a more extensive range of reliable, neutral sources
- Conducting out extra queries, such as those for proven adverse media searches
- Paying for an analysis of the client or beneficiary owner to learn more about their possible involvement in illegal behavior
- Checking the legitimacy of a business partner’s financial resources
- Asking the client to reveal more details about the nature of the relationship they want to establish with the company
In addition to this, FATF suggests that banks establish a risk-based monitoring scheme to detect unusual behavior.
What are the Methods of KYC procedures?
KYC procedures include three main components, which are the following:
- Customer Identification Program
Initial steps in the KYC procedure include the Customer Identification Program (CIP). However, it helps to identify high-risk clients in advance to minimize potential risks. In financial transactions, CIP has to confirm the identity of the client engaged. Moreover, it stops money laundering, terrorist funding, and other unlawful acts that create difficulties in the financial sector.
Furthermore, CIP uses EDD in banking strategy that helps financial firms to gather the clients’ information for bank account creation. However, the data include;
- Name of user
- Clients’ DOB
- ID card number
It facilitates the development of rules against which financial companies can provide a risk assessment to each client. Thus, EDD in banking procedures helps in the accurate verification of clients’ IDs and restricts fraudsters from manipulating businesses.
- Customer Due Diligence
Customer due diligence aims to determine the risk involved with a new user or the required transaction. If the user’s ID appears on any blacklist or PEP reports, the risk is high, and EDD is carried out. However, it determines the level to which a specific customer identity represents a threat to an organization. Moreover, enhanced due diligence in private and international banking aims to identify and remove any potentially fraudulent customers. Thus, EDD in banking is the most robust method to expose the identity behind money laundering and the support of terrorist groups.
- AML Screening
AML Screening is also the most important method in the KYC verification process. However, one-time authentication of users’ IDs is insufficient to identify fake identities. Therefore, thorough and continuous screening is necessary to verify customers’ identities to detect fraud. For this purpose, organizations use AML screening with KYC services for the accurate authentication of the users’ IDs and transactions. Thus, AML screening helps companies to keep track of all financial dealings and identify suspicious activities in business.
For this reason, organizations use risk-minimizing strategies that include guidelines for monitoring transactions. These include;
- Transactions exceeding the required limit
- Numerous transactions that occur frequently
- Suspicious transactions in business
What are the Benefits of EDD in Banking?
EDD in banking has several benefits for banks and other financial firms. Some of these include;
- It helps the banks to provide better customer services
- It helps to increase the company’s reputation in the business world
- It helps to build a trustworthy relationship between the user and the organization
- It helps in the identification of terrorist financing
EDD in banking helps firms to conduct thorough analyses of the identities of every new incoming user. However, it helps to detect customers’ risk levels by accurately authenticating their IDs. In this way, it prevents the businesses from hefty penalties and ensures business legitimacy. Thus, EDD in banking allows financial firms and banks to combat money laundering and terrorist financing activities in their business dealings.