A man/woman is considered a reflection of his/her surroundings. Just like that, a corporation is judged and considered a reflection of its associates or partners. The firm’s future in the market depends upon its client profiles and their approach to get them on board and to succeed in it, the organization must not forget the thumb rule which is that they have got to know about their clients as much they know about themselves. Although it’s practically impossible, the process can reach its maximum potential due to compliance with (Enhanced Due Diligence) EDD banking regulations and policies.
The regulatory bodies are quite rigid about non-compliance with KYC and AML policies and many have faced consequences of negligence. For instance, Standard Chartered was charged $1.1 Billion for money laundering in April 2020, Westbank, $1.3 Billion, Goldman Sachs with $3.9 Billion.
Every organization is obliged to act according to the setout policies of KYC and AML procedures to protect the assets of their customers, the reputation of the financial institution, and avoid high non-compliance fines.
The EDD banking is basically an extension of the Client Due Diligence (CDD) process which equips an entity to monitor the customer post getting him/her on board. The deviations in customers’ transaction patterns are detected and reported so an extensive investigation can take place to reach the core of the matter.
For KYC compliance, Customer Due Diligence for Banks comprises running security checks on individuals and organizations, e-KYC solution verifies their identity, origin, address, background, and relevant data, and confirms they have no signs or record of being a part of illegal activities. Based on the data collected, in the end, every profile gets a risk rating. While EDD banking is a whole different process.
After the rating is distributed, EDD banking comes into practice, the individual or company with a higher degree of risk falls under the category of throughout observation in the transactional behavior, and every possible situation of money laundering is dealt with by concerned authorities.
Another major difference is that CDD is merely restricted to verification of beneficial owners whereas EDD banking involves verifying the stakeholders and owner’s wealth sources as well, elaborated in the following section.
Also Read: Enter eMortgages, Exit Traditional Mortgage Originators
The entire procedure requires all kinds of effort and probably never ends. Therefore a perfect monitoring strategy is extremely essential to enhance its credibility for banks and other institutions.
After CDD, the suspected individuals and entities are further divided into different categories and a risk-based approach is used to examine the degree of risk which is supposed to be clear in the KYC/AML policies of banks.
The EDD banking process greatly depends on the UBO (Ultimate Useful Ownership) of the company. This process involves verifying the origin of monetary gains of the owner of the firm and his/her stakeholders as well. To comply with AML and KYC process, the banks determine that the financial benefits are coming from legal means and there is no asset or any business of the client kept secret from the bank. The nature of businesses and other sources of income of stakeholders also get verified to confirm that strategic alliances of the client are clean as well.
In EDD banking, the first indication of a threat is a sudden change in the transactional behavior of a client. The banks constantly observe high-risk-rated clients. If suddenly there are large sums of money being deposited or withdrawn frequently, the bank has a good reason to worry. The purpose and nature of the transaction must be verified along.
The external factors and human observation also strengthen EDD banking in different cases. For instance, a recession in a particular industry and a firm dealing in the same field is depositing an enormous amount of money, seems suspicious. Similarly, if an organization comes from a region where numerous cases of corruption are getting reported, the bar of risk would be higher.
It is one of the most commonly practiced methods in EDD banking. The experts at the organization investigate the recent events of things involving the client’s name. By visiting their corporate website, the reviews if there are any can be studied: not much useful but still. The news about recent partnerships and collaborations also helps in the investigation. The sets of information showcased about beneficial owners, board of directors, and company background may not give much to go on but the physical addresses can get confirmed through the webpage. It relieves banks and other financial institutions to some extent by witnessing the factory/office of their client.
Forming a professional relation puts the reputation of both parties at stake. Over time in the banking sector, numerous cybercrimes, and money laundering frauds have occurred. It sums up the fact that a constant inspection of risky clients must be carried out. EDD banking helps in detecting signs of a threat and equips banks to prevent any issue before it rises. It proves that other than one-time e-KYC verification, an additional constant investigation must be practiced by keeping track of news updates, UBO, and relevant information.
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