What Does EDD Stand for in Banking?

Enhanced Due Diligence (EDD) is a set of procedures in banking and financial services. Its purpose is to identify, assess, and mitigate risks associated with financial crime, including money laundering and terrorism financing. EDD is a component of a financial institution’s anti-money laundering (AML) framework, designed to prevent illicit funds from entering legitimate financial channels.

Understanding Enhanced Due Diligence (EDD)

Enhanced Due Diligence is a more rigorous investigative process that goes beyond standard Customer Due Diligence (CDD) procedures. While CDD involves verifying a customer’s identity and understanding their basic financial activities, EDD applies when a bank identifies higher risks with a customer or transaction. This intensified scrutiny aims to uncover financial crime risks not apparent through basic checks.

The core objectives of EDD include verifying the source of a customer’s funds and wealth. It also involves understanding the nature and purpose of the business relationship, ensuring it aligns with the customer’s profile. Identifying the ultimate beneficial ownership of entities, especially those with complex structures, is another goal to prevent illicit funds from being disguised. EDD helps banks make informed decisions about the level of risk a customer presents and implement appropriate monitoring.

Triggers for EDD Implementation

Banks initiate Enhanced Due Diligence when specific risk factors signal a higher potential for financial crime. One common trigger is a Politically Exposed Person (PEP), which includes individuals holding prominent public positions, their close associates, or family members. PEPs carry an elevated risk of bribery and corruption, leading financial institutions to implement EDD.

Another circumstance prompting EDD is involvement with high-risk jurisdictions or businesses in high-risk industries. These include casinos, real estate, cryptocurrency businesses, weapons dealers, and cash-intensive businesses.

Unusual or complex transaction patterns can also activate EDD. This includes large transfers, rapid fund movement, or international wire transfers that deviate from a customer’s expected activity. Transactions that appear to have no clear economic or legal purpose, or involve opaque ownership structures, may also lead to enhanced scrutiny. Negative media reports concerning a customer can similarly serve as a trigger for EDD.

The EDD Information Gathering Process

When a bank determines Enhanced Due Diligence is necessary, it initiates a process to gather detailed information about the customer and their financial activities. Banks request documentation to verify the customer’s identity beyond initial checks, such as government-issued identification and proof of address.

Information gathering involves understanding the customer’s source of wealth and source of funds. Source of wealth refers to the origin of a customer’s total accumulated assets, while source of funds relates to where the money for a specific transaction originates. Customers might be asked to provide financial statements, tax returns, pay stubs, or evidence of property sales. For businesses, banks may request financial statements, business licenses, and operational details.

The process also involves identifying and verifying beneficial ownership, especially for legal entities with complex structures. Banks conduct public record searches, adverse media screening, and inquiries into business relationships to gain a holistic view. This obtains sufficient information to assess money laundering and terrorist financing risks and ensure regulatory compliance.

How EDD Affects Banking Relationships

When a banking relationship is subject to Enhanced Due Diligence, customers experience increased scrutiny and more frequent requests for information. Account opening times can be longer, as the bank conducts deeper investigations into the customer’s background and financial profile. Customers should anticipate providing additional documentation and answering detailed questions about their financial activities.

Throughout the banking relationship, customers undergoing EDD face continuous monitoring of their transactions and account behavior. Banks employ monitoring systems to detect unusual patterns or deviations from the customer’s established profile. This ongoing vigilance ensures that emerging risks are identified promptly, and it may lead to further inquiries or requests for updated information.

The bank’s ongoing actions related to EDD involve regularly reviewing the customer’s risk profile and updating information as needed. This includes periodic refreshes of customer data and reassessments of their risk level. Should any suspicious activity be detected, banks are obligated to report it to authorities, such as the Financial Crimes Enforcement Network (FinCEN).