Whenever talking about KYC (know your customer), you absolutely need to think about EDD, which stands for enhanced due diligence. These are concepts that are vital in business and in all financial industries. Due to this fact, you have to clearly understand them both.
Know Your Customer is a set of processes that involve gathering data and information to verify client identity. In most cases, the goal is to make sure that people are not involved in some sort of money-laundering activity or another financial crime. When KYC involves an EDD process, the concept is similar. However, the difference is that there is greater depth and detail.
EDD was especially created in order to deal with the high-net work or high-risk customers, together with really large transactions. Because such customers and large transactions are riskier for the financial industry, they are monitored and regulated in a different way. Financial institutions and companies were forced to use EDD through the 2001 USA Patriot Act. The provision is still valid right now.
Due to the Patriot Act, offshore banking institutions, correspondent accounts and even private banking organizations have to respect EDD laws and regulations.
Various characteristics separate the regular KYC policies from the EDD policies. EDD policies are robust and rigorous. This means that they always require much more evidence, together with more information that has to be collected. EDD should always be properly documented, with regulators being allowed instant data access.
Data is being collected and then professionals are hired to analyze data, together with information source reliability.
With EDD, there is also a reasonable assurance that is used as a KYC risk rating is calculated. Professionals that make decisions have to complete all research steps and then exercise professional care and skill when a judgment was reached.
EDD will take into consideration absolutely all information. This includes all the official documents and even files posted online, if relevant. If the transactions are really large or the client has the necessary high-net-worth, leniency does not exist. Zero risks are taken.
KYC procedures have a really high standard that is respected by the financial institutions. The exact same thing applies to EDD. When an institution or a company discovers something that is suspicious, authorities need to be made aware. In addition, consistent monitoring is absolutely mandatory. Even compliance software has to be utilized by financial institutions. This is not required by law but it is heavily encouraged.
Every single financial institution with large clients or large transactions has to respect laws. A failure to do this always leads to serious consequences. Billions of dollars were paid in fines by the banks and different financial institutions that did not comply with KYC, AML and EDD regulations in 2018. More will likely have to be paid in 2019.
To sum up, EDD is similar to KYC but it is much more complex and stricter. Whenever you have to deal with EDD regulations, it is vital that you comply. Whenever this does not happen, fines are incredibly large.