What is Enhanced Due Diligence (EDD)?
- pdolhii
- 1 day ago
- 7 min read
Despite existing stereotypes, enhanced due diligence (EDD) is not limited to the banking and financial sectors. It is increasingly being used in industries such as legal services, corporate consulting, and real estate, where high-risk clients or transactions may occur. Law firms, corporate service providers, and real estate agencies use EDD when dealing with clients who pose a higher risk due to their country of origin, type of business, or transaction size. High-value transactions in the art, luxury goods, or cryptocurrency industries may also trigger the application of enhanced due diligence procedures. Essentially, the enhanced due diligence process is a risk mitigation tool, and its application depends more on the client's risk profile than on the type of business.
Understanding Enhanced Due Diligence
What is enhanced due diligence? Enhanced Due Diligence (EDD) is not just a standard check but a real «deep dive» into a customer's profile. When the question arises, «What is EDD?», the answer is simple: it is a comprehensive procedure that you can use to keep an eye on clients who potentially pose a greater risk, from money laundering to reputational pitfalls. The process ensures that even more complex cases are under control and under the watchful eye of specialists.
Due to the inherent risks of corruption and bribery associated with politically exposed persons (PEPs), the verifier is required to:
Conduct a comprehensive due diligence check, including media monitoring and screening against sanctions/watch lists,
Collect detailed documentation on the sources of wealth,
Conduct periodic checks every six months instead of once a year, and
Obtain senior management approval before opening an account.
EDD stands for: definition and meaning
EDD stands for Enhanced Due Diligence, i.e., the definition of enhanced due diligence is a thorough review of the client. It is not just a collection of passports and address references but a dive into the very essence of the business and the origin of funds. In other words, enhanced due diligence has meaning in which you need to be sure that the client is not a «pig in a poke» and that all financial threads are transparent and traceable.
Enhanced due diligence vs standard due diligence
Standard verification is a «letter-by-letter check»: identity, address, and sanctions lists. Enhanced due diligence is when business connections, ownership structure, and sources of wealth are scrutinized. In short, the enhanced due diligence definition is a «risk-based» approach: the higher the risk, the deeper they dig and unravel all the client's threads.
Why EDD matters in compliance
EDD is not a formality. It is necessary to avoid problems with regulators. If obliged entities do not keep the process under control, fines and reputational damage are inevitable. In addition, the use of enhanced due diligence procedures adds to the trust of partners and shows that transactions are transparent. Those who are involved in company incorporation or opening a bank account can be assured that everything is legal and under control.
When Is Enhanced Due Diligence Required?
High-risk customers and transactions
Enhanced due diligence is usually required for customers working in areas where financial risks are an integral part of the business: gambling, cryptocurrencies, or international trade. In this case, banks must check every detail of every transaction to ensure that no hint of illegal financial flows is overlooked. Simply put, everything is under the microscope and carefully checked.
Politically exposed persons (PEPs)
PEPs are people who occupy high-ranking roles within state or public authority of state or public authority. Due to the risk of corruption or bribery, banks have to approach them in a special way: assess their networks of contacts, study the sources of funds, and make sure that everything is clear. Thorough EDD is essential here — otherwise, you could run into serious problems with regulators.
Cross-border and offshore accounts
Customers who do business abroad or hold offshore accounts automatically come under the bank's «watchful eye». In such cases, enhanced due diligence is usually required for each transaction to comply with both local and international regulations. This means that every cross-border transfer of funds and every financial flow must be checked; otherwise, unpleasant surprises may arise.
For instance, under Section 312 of the USA PATRIOT Act, U.S. financial institutions must apply enhanced due diligence when dealing with correspondent accounts for foreign banks or cross-border banking relationships.
Enhanced Due Diligence Requirements
Information banks must collect
During enhanced due diligence procedures, banks receive more extensive information about the customer. In addition to standard documents, additional details are collected to meet enhanced due diligence requirements, allowing for a better assessment of risks.
These include:
Details of the ultimate beneficiaries — who really «hold the purse strings».
Sources of wealth and origin of funds — so as not to leave any questionable «traces».
Business models and transaction objectives — to understand why the money is going and where it is going.
This document establishes four key requirements, including:
customer identification and verification,
identification and verification of beneficial owners of legal entities,
understanding the nature and purpose of the customer relationship (customer risk profile),
ongoing monitoring of transactions and updating of information.
In this way, the bank has all the necessary information and can control risks at every step.
Verification and documentation standards
EDD involves «scrutinizing» all documents under a microscope. Banks do not limit themselves to what they have received — they compare data with reliable third-party sources, keep detailed records, and prepare them for any audits. In simple terms, if something does not add up, the bank immediately takes note and investigates further.
Ongoing monitoring obligations
Meeting enhanced due diligence requirements means that the process does not end after the account is opened. Constant attention is required here:
monitoring transactions,
identifying suspicious transactions,
regularly updating customer profiles.
This «continuous focus» helps not only to comply with the rules, but also to keep risks under control.
EDD Procedures and Process
EDD procedures involve a systematic approach: first, high-risk customers are identified, then data from independent sources is collected and verified, and the origin of funds and ownership structure are analyzed. Based on this, a risk profile is formed, the decision is approved by management, and the client is then subject to continuous monitoring and regular checks.
Step-by-step enhanced due diligence process
As a rule, enhanced due diligence procedures go through several stages:
Identification of high-risk customers — all questionable cases are «under the microscope».
Collection of detailed documentation and information about the customer — nothing is overlooked here.
Verification of sources of funds and wealth — all financial threads are unraveled.
In-depth background checks — all business connections and transaction history are reviewed.
Stricter internal approval processes — decisions are made with a double check.
Continuous transaction monitoring — everything is under control, with no gaps.
Risk assessment and customer profiling
Risk assessment is at the heart of the entire process. Banks compile complete customer profiles, assign risk levels, and adapt procedures to specific situations. If a customer is suspicious, the bank works as thoroughly as possible to leave no loopholes for financial fraud.
Enhanced due diligence measures in practice
In practice, enhanced due diligence measures may include:
face-to-face meetings with the customer,
review of audit reports,
consultations with external experts.
The combination of modern technologies and human experience allows banks not only to comply with regulatory requirements but also to protect themselves and their clients from financial risks effectively. The rule «technology plus expertise equals security» really works here.
Examples of Due Diligence
Standard due diligence examples
During standard checks (due diligence examples), banks usually verify:
Customer identification (passport or ID).
Proof of address.
Customer screening against sanctions lists.
For example:
A law firm checks a new client who wants to register a company in Ukraine: it asks for passport details, proof of residence, and checks the client against public business registers to ensure that they have no criminal convictions or sanctions. This is a clear illustration of due diligence examples in practice, a situation where the client is an individual with a local business, and a standard check confirms that there are no risks.
These are basic steps that allow you to quickly assess a customer without unnecessary bureaucracy.
Enhanced due diligence examples in banking
With EDD, checks become more in-depth:
Analysis of detailed business plans for company incorporation.
Confirmation of large international transfers using commercial contracts.
Verification of complex shareholder and ownership structures.
For example:
A bank receives an application from a customer who plans to transfer a significant amount from a foreign account and is a politically exposed person (PEP). As part of EDD, the sources of income are analyzed, the structure of the companies through which the money passes is checked, the media is monitored for reputational risks, and approval is obtained from senior management before opening the account.
Here, the bank does not work «by the book» but focuses on fully understanding the client's financial flows and business models.
Case studies and best practices
Due diligence examples: practical examples of EDD demonstrate how banks apply enhanced due diligence procedures in practice. For example, the FinCEN report describes a case involving the detection of shell companies used to launder money through international transactions. Another case cited in FATF materials involved a politically exposed person, where in-depth analysis of sources of income helped prevent corruption risks. Such cases confirm the effectiveness of a comprehensive approach.
The most effective results are achieved by organizations that combine automated monitoring systems with experienced compliance teams. This approach ensures compliance and protection against financial risks. In addition, banks can advise clients on tax advantages and VAT/VIES as part of a comprehensive compliance strategy.
FAQ on Enhanced Due Diligence
What is EDD in banking?
In banking practice, EDD refers to enhanced due diligence and monitoring procedures that are applied to high-risk customers and go beyond standard verification.
What does EDD stand for?
EDD stands for Enhanced Due Diligence. It is a compliance tool that helps with more detailed control and monitoring of customers.
What is the difference between due diligence and enhanced due diligence?
Standard verification covers basic steps, while enhanced due diligence requires in-depth customer analysis, collection of additional documentation, verification of sources of funds, and ongoing monitoring of transactions.
When is enhanced due diligence required?
EDD is required for high-risk customers, including politically exposed persons (PEPs), foreign account holders, companies with offshore structures, or those operating in high-risk industries.
What are enhanced due diligence procedures?
Enhanced verification involves: collecting and verifying detailed information about the customer, documenting the sources of funds, analyzing the business model, and regularly monitoring financial transactions to prevent abuse.
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