Saturday, April 13, 2024
Saturday, April 13, 2024

How to Conduct Enhanced Due Diligence? 

by Swati Raghuwanshi
Conduct Enhanced Due Diligence

It is true that all businesses start with a profit motive. However, companies must also focus on their cash flow. They must be aware of any illegal activities going on within the company. Even though there are legal remedies, still the companies must take steps to prevent any fraudulent activities going on. This can be done by being alert and aware of all the people’s identities they deal with. The activities which can cause trouble to companies are money laundering and terrorist financing. In order to decrease the chances of trouble, companies identify and verify their customers. This is done by some processes called Know your Customer (KYC) and Anti-Money Laundering (AML). The process of Enhanced Due Diligence (EDD) is an addition to the KYC process.

Meaning of Enhanced Due Diligence 

High risked customers are very harmful for the company. As they can drain the company of its wealth.Therefore,it is very important for companies to differentiate between normal customers and risky customers. In order to differentiate between them, it is essential to identify them. Therefore, EDD is a process used here. It helps to identify and monitor these high- risk customers.

What is the Enhanced Due Diligence Procedure? 

Under the Enhanced DD process, a certain type of procedure is followed. EDD is a rigorous process. It collects additional information used for high-risk cases. It aims to understand and mitigate risks for the companies. It ensures compliance with regulations. Process of this Due Diligence involves the following simple steps: 

  • Collect all the necessary information of the customer. 
  • This includes information other than the general information collected for the KYC of the customer 
  • Identify the customer properly with the additional information 
  • Identify the customers relationship with the company
  • Check the proper background of the customer 
  • Make sure to confirm the intention of the customer 

Who are High-Risk Customers? 

As we have already seen, EDD is a process which helps to know harmful customers. Therefore it is very important to know who these Customers are. There are some people who have the intention to cause downfall to a company. They may be involved in activities like money laundering, fraud, terrorist financing etc. These people may include the following: 

  • Politically Identified Persons (PEP)
  • Customers who are non- residents of India
  • Customers whose reputation is at risk
  • Customers who have contacts in High-risk countries
  • Customers involved in unlawful activities

Why is it Important to Conduct Enhanced Due Diligence? 

EDD is a process to reduce loss to the company. This loss is caused by high-risk customers. The loss can be due to various illegal activities. Which include money laundering, fraud, phishing, cyber crime etc. Therefore, in order to avoid these problems, the process of Enhanced DD is necessary. It helps identify the identities of the wrong doers and save the company from loss. The importance of Enhanced DD is given below: 

  • Anti- Money Laundering The EDD process, helps save the company from becoming victim to money-laundering. This process identifies the individuals who pose a threat to the company.
  • Increase Awareness- This process helps the company employers and managers be alert and aware of the type of customers they deal with. This helps them to detect any illegal activity in the future. 
  • Accurate Risk Management- By collecting all the necessary information regarding the activities of the customers, the company becomes well aware of all the risks associated with them. Hence, it also knows how to manage those risks accurately. This saves the company from further harm caused by other customers.    

How to conduct Enhanced Due Diligence?

Given below is the manner in which the process of EDD is conducted: 

Pointing out Factors which Lead to High-risk

The very first step of the EDD Process is to realize the major factors associated with high-risk. High-risk factors include, the origin and residence of the individual, type of business and nature of business. All these will help you out to know whether the customer is good to go or not. 

Deep Research

The next step after identifying high-risk factors, is conducting deep research about the whereabouts of the customer. This research can be done by using online databases, records, social media etc. By this, we can gain more information about the customer as well as the risk level. 

Visiting the House of the Customer

In many cases, it is important to visit the customer’s house personally. By doing this personal information of the customer can be gained. This personal information allows us to know the kind of person the customer is. We can also come to know his reputation in society. This is one of the very important parts of the process of EDD. 

Making Reports

After the process of Enhanced  DD is over, it must be documented. Each and every procedure is to be recorded. All this information regarding the identification and risks observed is supposed to be mentioned in a report. That is how you can complete the proper EDD which helps you to determine the things regarding the customers other than the information you received during the time of the KYC of the customers. 

Difference Between Enhanced and Customer Due Diligence   

Both the Due Diligence processes are used to identify the real identities of the customers. As it is very essential for companies to know who they are dealing with. However, there is a little difference between both. Customer Due Diligence is a process used to gather information related to all the customers of the company. Whereas EDD is used to find out the identity of only high-risked customers. Hence, in short EDD is one part of Customer Due Diligence.Therefore, the companies conduct KYC checks.   

Types of Customer Due Diligence

There are 3 kinds of customer due diligence. They are given below: 

  • Simplified Due Diligence- This is also called Lowest Due Diligence. This process is used by companies to identify low-risk customers. 
  • Enhanced Due Diligence As we have already seen above, the EDD is a process used to identify the High- risked customers.
  • Regular Due Diligence- This kind of Due Diligence is used to identify and collect information relating to the customer. Information includes name, residence, identification proof, photograph of the customer. This is done as it is very essential to know the people who the company is dealing with. Companies should not keep eyes closed and trust every customer. 

Conclusion

It is concluded that companies deal with various types of people each day. They also make transactions, sign contracts etc with them. Some customers can be risky. They can cause loss to the companies. Therefore it is very essential for companies to know the people they are dealing with. This is where the Enhanced Due Diligence process comes into play. It must be conducted by all companies. It is used to identify and collect information relating to high-risk customers. This process saves the company from becoming victims to fraud.  

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