Enhanced Due Diligence (EDD) – Security Solutions for Digital Transactions
Digital banks are striving to generate more revenues and reach unexpected growth. However, in this process, they should not overlook customers and their transactions. Therefore, legal authorities like FATF have made efficient Know Your Customer (KYC) verification mandatory. This is to identify clients with intentions to launder money or exploit financial systems. The lack of efficient checks to cross-validate UBOs and stakeholders can further bring adverse effects.
In order to ensure customers will not bring transaction challenges, regulatory bodies have made Enhanced Due Diligence (EDD) for banks a compulsion. Financial institutions require more than just customer verification as it fails in identifying clients belonging to sanctioned and blacklisted regions. This blog covers FATF's guidelines regarding enhanced due diligence compliance.
FATF's Guidelines Regarding KYC CDD and EDD Compliance
Client due diligence is not enough for identifying criminals with high risks of money laundering. It is insufficient in dealing with customers who either are part of blacklists or belong to sanctioned countries. As regulatory bodies are strengthening their AML/CTF laws, EDD in banking is a sure way to prevent transaction fraud.
The Financial Actions Task Force (FATF) is outlining enhanced due diligence guidelines for banks to better deal with suspicious transactions and clients. Within its 40 Recommendations, this regulatory watchdog recommends financial institutions build an efficient Risk-Based Approach (RBA). With this, banks can ensure compliance with enhanced due diligence regulations while countering money laundering and terrorist funding.
Transactions criminals use to finance malicious activities are detectable through a thorough risk assessment of customers. It further provides flexible measures for securing online operations. As digital evolution is taking payments to online funds transfers, financial institutions require robust enhanced due diligence solutions. They not only streamline transaction monitoring but also ensure efficient protection of resources.
Mitigating High-Risk Transactions with EDD in Banking
As per the regulatory authorities' guidelines, the enhanced due diligence procedures involve a variety of checks. These standards provide a thorough risk assessment of customers and their transactions. However, in the case of manual verification, the process can become lengthy, complex, time-taking, and prone to discrepancies. On the contrary, automated KYC processes streamline EDD while providing instant identification and risk assessment.
The enhanced due diligence process is simple, accurate, and quick. This makes transaction monitoring and preventing the flow of illicit funds easier. The next section provides a detailed guide through the process:
Developing Risk Score
In the first step, banks need to develop a risk-based approach toward customers to analyze their transactions. This helps in classifying clients into different categories pertaining to their chances of performing illicit activities. Furthermore, this step provides the basis for the identification of enhanced due diligence. This is so as it helps in highlighting information required for particular customers.
Creating EDD Checklist
After classification, the next step in KYC Compliance involves preparing a checklist of information required for identifying customers. This involves outlining information and collectively obtaining it from clients.
Cross-Validating UBOs, Shareholders, and Sources of Funds
The enhanced due diligence process involves validating clients' source of income and funds they are putting into the financial systems. Criminals often choose online payment methods to flow their proceeds of crimes and convert them into clean money. After this, fraudsters use these funds to deposit in legitimate banks.
In order to perform efficient cross-verification, banks should integrate financial services that automate enhanced due diligence and screening of customers. Moreover, they provide analysis of both legal and non-financial assets of UBOs to prevent malicious activities while assisting businesses.
Ongoing Monitoring of Transactions
The next step of EDD in the banking process involves obtaining and analyzing previous transactions of customers. Information regarding the receiver, duration of the transfer, and methods of payments further add to the transaction monitoring process. Moreover, enhanced due diligence also involves cross-checking whether the fund transfer is within the threshold and how often customers perform it.
Reputational Checks for Businesses
Banks dealing with companies for loans, finance management, or other such tasks should validate them prior to providing assistance. Moreover, to tackle high-risk transactions, institutions need to check the reputation of businesses. This involves cross-verifying owners, staff, and firms' identities against sanctions and other watchlists.
Final Thoughts
Enhanced due diligence is a crucial measure for financial institutions to deal with high-risk customers and the transactions they perform. This process enables them to gain insights into clients' backgrounds, sources of funds, and other such details. With digital EDD compliance solutions in place, online banking services can safeguard their systems against the flow of illicit funds. Online enhanced due diligence services enhance the credibility of financial institutions while countering criminal intentions efficiently.