Enhanced Due Diligence Meaning 

Enhanced Due Diligence (EDD) refers to a variety of processes that relate to the in-depth verification of information and the assessment of risk. By helping businesses to assess and monitor risk, EDD provides invaluable information that empowers businesses to make responsible and informed decisions regarding risk mitigation.

EDD forms part of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) legislation that mandates financial institutions to take responsibility for ensuring that the identities of their customers are verified and that their activities are validated so as to mitigate the risk of financial crimes. 

The exact systems and methods for carrying out EDD may vary from case to case and use a variety of different tools. 

Why Is Enhanced Due Diligence Important?  

Businesses, institutions and organizations are often legally obligated to conduct EDD. Legal requirements such as these – otherwise referred to as regulatory compliance obligations – are typically outlined and enforced by national regulators tasked with creating and enforcing laws to combat the threat of financial crimes like money laundering. 

In South Africa, regulatory compliance obligations such as these form part of South Africa’s AML/CFT legislative framework, which is dictated and enforced according to the principles of a Risk-Based Approach (RBA). This means that businesses are obligated to create their own risk management programmes within various set parameters, which must then be approved by the Financial Intelligence Centre, which is South Africa’s regulator. 

Compliance with regulatory requirements for EDD protocols is essential if businesses, institutions and organizations wish to avoid serious legal consequences – in cases of non-compliance, national regulators can hand out severe fines and even jail time. 

Notably, however, it is often in the interests of businesses to conduct EDD above and beyond what is required by law. By conducting EDD, businesses gain access to a vast amount of information that empowers them to make informed decisions in order to better assess and mitigate risk, thereby minimizing the chances that a business will be caught off guard and hurt by a malicious actor. 

Accordingly, failure to conduct EDD increases the risk that a business is exposed to. By failing to verify identities and validate information, a business puts itself at greater risk of falling victim to financial crime or being implicated in money laundering schemes. In such instances, the associated financial and reputational losses can be devastating. 

What is the Difference Between Enhanced Due Diligence and Customer Due Diligence (CCD)? 

Customer Due Diligence (CDD) broadly refers to the practices of identity verification and information validation that are applied to the majority of ordinary, low-risk customers. CDD relates to standard identity verification using Know Your Customer (KYC) standards. For example, CDD will be applied to customers opening a normal bank account. 

Enhanced Due Diligence is an extension of CDD and is applied in situations that involve higher risk and greater complexity. For example, Enhanced Due Diligence is necessary for large international transactions that pose a high risk of financial crimes like money laundering. EDD takes place within the strict regulatory guidelines of AML/CFT compliance regulations. 

Online Enhanced Due Diligence 

The rise of online identity verification and data validation tools has revolutionized identity verification and data validation systems. Today, every single check that falls under enhanced due diligence – identity verification, address validation, business registration, AVS, etc. – can all be conducted online.

Online tools enable highly efficient, accurate and cost-effective means for enhanced due diligence that leverage powerful technologies like biometric information and artificial intelligence to deliver incredibly accurate and reliable risk analysis information. 

Furthermore, the personal information necessary for the verification of an individual’s identity can be pulled from a variety of trusted and secure sources, thereby increasing the reliability of the verification. 

Online tools for EDD also means that EDD can be conducted anywhere, at any time. Furthermore, online EDD allows for the verification of remote individuals – clients and individuals on the other side of the world can easily be vetted, while businesses have the capacity to efficiently onboard new clients, customers and employees in a seamless and secure remote-onboarding process. 

To find out how ThisIsMe can equip your business with world-class tools for enhanced due diligence, contact our team here.

How to Conduct Enhanced Due Diligence 

When conducting EDD checks, the amount of information that the subject needs to provide will vary and be determined by the specific context – for example, EDD checks on a single individual will require different data compared to EDD conducted on a legal entity such as a company. 

Although the exact process of conducting EDD will vary on a case-to-case basis, what follows is a broad example of how EDD may be conducted. 

Firstly, EDD will typically enhance the more basic/initial identity verification checks that are conducted during the Know Your Customer (KYC) process. KYC is a term that refers to procedures and mechanisms that are used to verify the identity of customers before conducting business with them. 

When conducting KYC checks, a business will typically be verifying:

• That an individual exists 
• Whether that individual is exactly who they claim to be 
• Whether that individual is eligible to receive the product or service in question 
• Whether that individual poses a threat of money laundering or other such crime

Once this more basic information has been verified, EDD will build upon it by carrying out more intensive and detailed checks. These EDD will check for several factors, which may include:

• Politically Exposed Person (PEP) status 
• Whether the individual or business is under sanction/embargo 
• Existence of adverse media (individual or business features in adverse media coverage)
• Unusual and/or suspicious economic and transactional activity, such as being seemingly pointless or overly complex. 

Notably, however, exact EDD checks will typically vary a lot on a case-to-case basis, as the information required by a client during an EDD check will depend on factors such as the nature of the business, the industry in question, and the reason for conducting the check. 

Examples of Enhanced Due Diligence Red Flags 

EDD may lead to the discovery of information that can be considered “red flags”. 

• Politically Exposed Person (PEP): An individual being flagged as a Politically Exposed Person (PEP) does not implicate them in any sort of criminal activity or mean that businesses cannot be conducted with them. However, it does mean that the individual poses a high risk of financial crime and in many countries obligates the business, institution or organization to put specific protocols in place when doing business with the PEP.
• Individual or Business is Sanctioned: EDD may reveal that an individual and/or business appears on a sanction list. In such an instance, it may be illegal for business to be conducted with them.
• Implicated in Crime: EDD may reveal that an individual or business has been implicated with, or is closely associated with, an incident of financial crime.
• Existence of Significant Adverse Media: Although adverse media does not criminally implicate an individual or business in anything, adverse media coverage and the associated bad publicity may be a reputational risk for business partners and/or clients. Consequently, the existence of adverse media may influence decisions related to whether or not business should be conducted with the relevant individual or company.
• Suspicious Economic and Transactional Activity: Such activity may indicate financial crime like money laundering.

Applications of Enhanced Due Diligence 

EDD is widely used throughout a variety of industries. EDD protocols can be adjusted to meet the specific needs of each business, institution or organization, thereby ensuring that every demand is perfectly met, every time. Below are some examples of how EDD is used within the contexts of three specific industries.   

• Real Estate Due Diligence: EDD is widely used throughout the real estate industry. The high-value transactions that are typical of the real-estate industry pose a high risk of financial crimes such as money laundering. This risk is mitigated through the use of EDD to verify the identities of the relevant parties and validate information associated with the transactions. In South Africa (as well as across the world), EDD for the real estate industry is mandated as part of a comprehensive AML/CFT legislative framework.
• Supplier/Vendor Due Diligence: Around the world, rising levels of economic crime and fraud have made EDD more essential for the purpose of protecting businesses against fraud and mitigating risk by verifying the integrity of business partners. Before conducting business with a business partner, EDD protocols are used to verify the information of measures such as these are crucial for mitigating risk and ensuring that the business partner is legitimate and will attempt to defraud other businesses.
• Investment Due Diligence: For investment; for example, private wealth management services are exposed to high levels of risk related to money laundering. Consequently, investment firms are legally obligated to conduct EDD. 

Application of EDD Within a Risk-Based Approach (RBA)

Enhanced Due Diligence is more intensive and requires more information to make an assessment, so requirements for EDD are typically applied within the framework outlined by a Risk-Based Approach. 

The exact demands for due diligence will often be determined by the Risk-Based Approach (RBA). An RBA is a system of risk management that adjusts itself depending on the risk level of a country, industry, or specific business. When applied to AML/CFT legislation, an RBA means that obligations for regulatory compliance will vary depending on the risk of money laundering in a specific context (for example, a small, low-risk tech startup will have fewer compliance obligations than a high-risk multinational bank). Due to this tailored approach, an RBA can create efficient AML/CFT programs that are tailored to a specific business or industry. 

Enhanced Due Diligence Services for South Africa 

ThisIsMe provides businesses with the tools necessary to verify identities, validate information, secure transactions, and mitigate risk. 

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here.