Under the Money Laundering Regulations 2017, many businesses are legally required to carry out Know Your Customer (KYC) checks on their customers, including Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD).
Customer Due Diligence and Enhanced Due Diligence are regulatory standards that play an essential role in every robust anti-money laundering compliance programme and apply to many industries.
Considering that ‘economic crime costs the UK economy £290 billion annually’, it’s clear how important both CDD and EDD are to a range of businesses.
In this guide, we’ll cover some key information on Customer Due Diligence and Enhanced Due Diligence, their differences, and how Credas can help streamline your Due Diligence.
Let’s get started.
Regulated firms are required to know who they are entering into a business relationship with.
As such, businesses that are required to meet CDD and EDD compliance requirements conduct KYC checks.
What Is The Difference Between Customer Due Diligence And Enhanced Due Diligence?
In short, the main differences between Customer Due Diligence and Enhanced Due Diligence are the level of risk, the depth of investigation needed and the monitoring and documentation required.
Before we go further into this, let’s first break down what CDD and EDD are:
What Is Customer Due Diligence (CDD)?
Customer Due Diligence is a series of KYC processes designed to assess customer risk.
CDD involves carrying out various checks to obtain personal information about a customer, such as their name, date of birth, and address, to name a few details.
Customer Due Diligence aims to prevent money laundering and helps to ensure that your customers aren’t involved in any illegal activity. It is made up of 3 main steps:
- Identify – The CDD process begins with identifying who the customer is.
- Verify – The customer’s identity is then verified against reliable sources, such as government-issued identification documents.
- Assess – The purpose and intended nature of the business relationship or transaction is then assessed.
While you can’t avoid conducting CDD, many organisations adopt what is known as a risk-based approach ‘to determine the extent and quality of information required and the steps to be taken to meet the requirements’.
To learn more about Customer Due Diligence, be sure to read our complete guide here.
What Is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence (EDD) is a type of CDD check that involves a series of advanced procedures that must be followed when a customer or transaction is assessed to have a higher risk of being involved in money laundering or alternative financial crimes.
EDD involves a set of steps that are more thorough and extensive than the initial Due Diligence process.
Examples of how Enhanced Due Diligence could work include:
- Accessing additional identity information from a variety of sources
- Determining an individual’s source of wealth
- Analysing the purpose and nature of a business relationship
EDD should be applied when a customer or transaction is deemed to pose a higher risk.
CDD Vs EDD: Key Differences
As we touched on above, the primary differences between Customer Due Diligence and Enhanced Due Diligence are the level of risk and the depth of investigation needed, as well as the monitoring and documentation required.
But, what does this actually mean?
Level Of Risk & Depth of Investigation
While Customer Due Diligence is applied to all customers and is a basic level of Due Diligence, Enhanced Due Diligence, on the other hand, is reserved for high-risk customers who need further scrutiny.
As such, EDD requires a more detailed investigation. EDD could be required due to a range of reasons, from high transaction amounts, funds coming from high risk third countries, to the customer being a Politically Exposed Person (PEP), such as an MP, or having a history of being involved in financial crime.
The depth of the investigation is more extensive as EDD delves further into an individual’s background, financial activities, and other risk factors to ensure that the firm is not unknowingly facilitating financial crimes.
Monitoring & Documentation
A difference to mention between CDD and EDD is in the area of monitoring and documentation.
When it comes to Customer Due Diligence, monitoring is carried out periodically and focuses on identifying deviations from the customer’s normal transaction patterns.
What’s more, the documentation collected during Customer Due Diligence is generally enough to establish the customer’s identity and gain a strong understanding of their financial activities.
Enhanced Due Diligence, on the other hand, requires continuous monitoring of the individual’s transactions.
Businesses must closely monitor high-risk customers’ activities in order to identify and assess any unusual or suspicious transactions that they make.
EDD also requires additional documentation in order for firms to acquire a more comprehensive understanding of the customer’s background, financial history, and the risk associated with their activities. This might include tax returns and financial statements, for example.
We hope that this article has given you a better understanding of the difference between Customer Due Diligence and Enhanced Due Diligence.
If you’re interested in simplifying your Due Diligence, Credas can help.
How We Can Help
We’re transforming the way businesses manage their compliance and customer onboarding processes.
Our software uses the latest cutting-edge technology to help firms streamline their Customer Due Diligence, with our ID verification and AML checks helping eliminate unnecessary manual processes while ensuring a high level of compliance.
Get in touch with our experts today to learn more about our services or to book a personalised demo.
