Not every business relationship carries the same risk. Enhanced Due Diligence, often abbreviated to EDD, is the additional research step applied when a standard check does not provide sufficient certainty.
What is Enhanced Due Diligence?
Enhanced Due Diligence is in-depth customer research applied where the risk profile is elevated. Whereas standard due diligence focuses on establishing identity, UBOs and a basic risk assessment, EDD goes a step further: it looks more closely at the source of funds, the corporate structure, reputation and the plausibility of the business relationship.
The starting point is a risk-based approach: the higher the assessed risk, the more extensive the research.
When is Enhanced Due Diligence required?
A number of situations usually lead to an elevated risk profile and therefore to the need for EDD:
- High-risk countries — the customer, UBO or counterparty is based in, or has strong ties to, a country with an elevated risk profile.
- Politically exposed persons (PEPs) — the involvement of a PEP in the corporate structure calls for additional attention.
- Complex ownership structures — several intermediate entities, trusts or structures that make the ultimate beneficial owner less transparent.
- Unusual transaction patterns — transactions that do not logically fit the customer's profile or business activity.
- Adverse media or previous compliance signals — reporting or earlier findings that give reason for further investigation.
What does Enhanced Due Diligence add?
Whereas standard due diligence is often limited to identification and a basic check, EDD can include:
- More extensive research into the source of wealth and funds
- More in-depth adverse media and reputation screening
- Fully tracing complex ownership structures
- Additional assessment of the business rationale behind a transaction
- Establishing the reason for any unusual features in the structure
Example from practice
An organisation enters into a relationship with a new business partner whose UBO holds a prominent political position in another country. A standard check would not sufficiently address this risk. With Enhanced Due Diligence, the source of this UBO's wealth is examined more closely, along with any adverse media, before the relationship is entered into.
Frequently asked questions
Is Enhanced Due Diligence always mandatory for a PEP?
The involvement of a PEP is usually regarded as a risk-increasing factor that calls for additional research, even if there are no other direct indications of problems.
How long does Enhanced Due Diligence take?
This depends heavily on the complexity of the structure and the availability of information. It usually takes longer than a standard due diligence investigation.
Can a relationship still be entered into after Enhanced Due Diligence?
Yes. EDD is intended to enable a well-founded decision, not to refuse a relationship by definition. The outcome may be that the risk has been sufficiently explained and is manageable.
TradeRisk supports organisations with Enhanced Due Diligence as part of due diligence and KYC. Also read more about Customer Due Diligence and what a UBO is.