EDD (Enhanced Due Diligence)
EDD is the additional scrutiny applied to higher risk relationships. It is defined by what it produces: an evidenced understanding of where the money comes from.
Definition
Enhanced due diligence (EDD) is the set of additional measures a regulated firm applies when a customer, transaction or relationship presents a higher risk of money laundering or terrorist financing. It sits on top of standard customer due diligence rather than replacing it.
EDD is not a fixed checklist. The rules name certain situations where it is mandatory and certain measures it commonly includes, but the depth of the work is meant to match the risk. An enhanced review of a domestic PEP with a straightforward salary will look very different from one of a foreign official moving funds through several jurisdictions.
The useful way to think about EDD is by its output. At the end of it, the firm should be able to explain, with evidence, who the customer really is, where their wealth and the funds in the relationship came from, and why the activity it expects to see makes sense.
Why a regulated firm cares
Higher risk relationships are where laundering is most likely to succeed and where the consequences of getting it wrong are most serious. Standard checks confirm identity. They do not usually tell a firm whether a customer's money is legitimate. EDD is where that question is answered.
EDD also protects the firm's decision. A higher risk relationship that has been properly examined, approved at the right level and monitored can be defended. One that was waved through, or declined without analysis, is hard to defend in either direction.
When EDD applies
Common triggers include:
- the customer or beneficial owner is a PEP, or a family member or close associate of one;
- the customer is established in, or the transaction involves, a high risk third country;
- correspondent relationships with respondent institutions in other countries;
- complex or unusually large transactions, or unusual patterns with no apparent economic or lawful purpose;
- the firm's own risk assessment rates the relationship as higher risk for other reasons, such as the product, delivery channel or adverse media.
What EDD involves in practice
Typical measures include:
Source of wealth. How the customer accumulated their overall assets: employment, business ownership, inheritance, investments. This is about the whole picture, not the funds in one transaction.
Source of funds. Where the specific money entering the relationship comes from, for example the sale of a named property or a dividend from a named company.
Senior management approval. A person with sufficient authority signs off on establishing or continuing the relationship, having seen the risks.
Additional information and verification. More detail on the nature of the business, the intended activity, and the ownership and control structure, with independent corroboration where possible.
Enhanced ongoing monitoring. More frequent reviews and closer transaction monitoring, with the review interval set at approval rather than left open.
The weak point in most EDD files is corroboration. A customer's statement that their wealth comes from "business activities" is a claim, not evidence. Company accounts, sale contracts, tax filings and public records turn it into something a reviewer can test. Where the firm cannot establish source of wealth to its satisfaction, that is a finding, and it should drive the decision.
Regulatory basis
FATF Recommendation 10 sets the baseline for customer due diligence and expects enhanced measures where risks are higher. Recommendation 12 requires specific enhanced measures for PEPs, Recommendation 13 covers correspondent banking and Recommendation 19 covers higher risk countries.
In the EU, Directive (EU) 2015/849 requires enhanced measures in higher risk situations, including PEPs and correspondent relationships, and Directive (EU) 2018/843 added specific enhanced measures for business involving high risk third countries identified by the European Commission.
In the UK, the Money Laundering Regulations 2017 list situations where EDD must be applied and factors firms must consider, and the FCA's guidance on PEPs addresses proportionate EDD for that population.
In the US, enhanced due diligence requirements apply to certain correspondent accounts and to private banking accounts for non-US persons, and firms are expected to apply risk based enhanced measures within their AML programmes.
Firms should confirm the precise triggers and measures under the rules that apply to them.
Worked example (hypothetical)
Ms Clara Wendt applies to open an investment account and plans to deposit a large sum. She is a resident of a country on the firm's high risk list and is the sole owner of a logistics company.
The analyst requests company accounts for the last three years, which show consistent profits. Ms Wendt explains that the deposit comes from a dividend. The analyst obtains the board resolution declaring the dividend and a bank statement showing its receipt, and checks company registry records to confirm her ownership. Adverse media searches return nothing relevant.
The file sets out source of wealth (accumulated business profits, supported by accounts), source of funds (a specific dividend, supported by documents) and the residual risk from the jurisdiction. A senior manager approves the relationship with a six month review. The expected activity is recorded so that monitoring has something to compare against.
Related terms
Related Articles
Account Takeover (ATO)
A form of identity theft where a fraudster gains access to a user's bank accounts, email, or other services.
Adverse Media
Adverse media is published information linking a person or company to crime or serious misconduct, screened as part of customer due diligence.
Alert Rules
Configured parameters within AML software that automatically trigger an alert when suspicious activities match defined criteria.
Algorithmic Fraud
Automated and programmatic approaches to attempting financial fraud at scale utilizing bots and specialized software.