Conducting enhanced due diligence (EDD) on pre-existing and potential new customers is a rigorous and thorough process. Yet, due to regulation and compliance laws, financial companies are obligated to meet the expected standard of due diligence. The reasons behind these regulations are important since the primary concern of governments and regulating bodies is to protect the security of the state it governs. To prevent anti-money laundering and other irregular transactions, each step in the client’s due diligence process has to be well-documented. The process or portal through which these verifications are done is popularly known as Know Your Customer (KYC).
As you may know, due diligence must be followed by private banking institutions and other companies in the financial sector. Not only does EDD help financial companies handle high-risk customers, but it also helps them adhere to data confidentiality requirements. Furthermore, the financial sector finds itself more exposed to risks such as money laundering and terrorist financing, since it is an industry driven by revenue. Therefore, companies in the financial sector have to be detailed and cautious in their dealings with high-risk customers, more so than in other industries.
What Kind of Risks Must Companies Manage?
Several factors can category customers as high risk, some of these factors are:
Customer/Transaction Type: Are the customers of a company non-residents of the institution’s country? In such a scenario, the financial company providing services to non-residents will require strict EDD processes so that regulating bodies have enough verified data to monitor for any suspicious activities. Suspicious activity can include payments or transactions conducted by seemingly unrelated third parties, thus requiring verification. Another factor of concern is anonymous or non-face-to-face transactions. However, not all EDD is centered around tracking suspicious or illicit activities. EDD is also carried out for large financial transactions, payments, and deals.
Geographical and Political Factors: It might be so that a financial company has customers from politically sanctioned countries. In most cases, it is normal for individuals from sanctioned countries to be classified as high-risk customers, requiring Enhanced Due Diligence to resolve the matter. It might also happen that customers from a country known to house unsociable organizations or groups (e.g. terrorist organizations) will require EDD processes for security reasons. EDD processes may also apply to countries that have a high level of corruption or insufficient due diligence processes (as per the domestic regulatory body’s requirements).
Financial Crimes: As was touched upon earlier, the financial industry is susceptible to crimes such as money laundering and terrorist financing. enhanced due diligence plays an important role in helping financial companies prevent suspicious or illicit activities.
Strategies For Effective EDD Practices
Other than the strict Know Your Customer systems and regulatory compliance laws that financial companies must adhere to, there are additional strategies they can leverage to better tackle large transactions or activities of an uncertain nature. Listed below are several vetted practices that financial companies utilize to manage the sea of customers and data they receive.
-
Financial companies strive to develop and maintain efficient and effective monitoring systems that can track suspicious transactions or customer information in real-time.
-
Another option for financial firms is conducting intelligence reports on transactions and activities that require a higher EDD. They can also help a financial firm determine if a client or owner is engaging in any illicit activities. Firms can also request additional details regarding the client’s intent and the nature of the business relationship/transaction.
-
An important strategy that financial firms utilize is assessing the sources of money for a particular transaction or client.
-
Financial firms can introduce additional data and document requirements that high-risk customers would have to provide. If the documents procured are obtained from trustworthy or impartial sources, then better safety practices can be ensured. Finally, financial institutions and banks can rely on additional research methods to conduct further background studies of a high-risk customer or transaction.
CONCLUSION
Since financial companies in particular are prone to financial crimes, enhanced due diligence becomes an essential tool for financial companies. Although there are strict regulations in place to help protect companies and the security of the country they operate out of, financial companies utilize further strategies to protect their interests. Many circumstances can create the requirement for an EDD process, some of these being customer type, political factors, geographical factors, and data security measures.
