Financial institutions rely on the KYC process to identify and thwart potential criminal activity, including Customer Due Diligence (CDD). These measures guarantee adherence to AML regulations. Criminals are becoming more skilled as they use various methods to hide their money and avoid detection by authorities. Inadequate client risk assessment increases the likelihood of criminals using a financial institution.
High-risk clients, accounts, and pursuits can be located using Enhanced Due Diligence. These measures are implemented to stop any illicit attempts to steal from banks. Integrating enhanced due diligence solutions driven by AI helps increase protection against fraudsters.
Let’s discuss how identifying Ultimate Beneficial Owners (UBOs) might improve the accuracy of enhanced due diligence procedures.
The Role of the EDD Process In the Customer Identification Program
The annual amount of money laundered by criminals is estimated to be between $800 million and $2 trillion. Due to this huge growth over the past decades, financial institutions must implement effective crime prevention procedures to protect their systems against fraud. In exchange, they verify customers’ identities to assist businesses in developing risk profiles. Thus, enhanced due diligence checks aid in evaluating the potential for money laundering and other crimes.
CIP is the first program to conduct a thorough risk analysis and enhanced due diligence. It helps banks and other financial organizations determine the level of criminal risk an individual or business poses. In addition, they can place clients in risk categories and support them based on that. The key component of the EDD process is collecting data useful for preventing criminal activity.
CDD and KYC enhanced due diligence procedures outline actions that raise red flags about a bank account holder. Similarly, financial institutions can carry out CIPs effectively with well-defined policies, risk-based procedures, and enhanced due diligence measures. Further, they can stay compliant, report any suspicions to authorities on time, and put the required crime prevention systems in place.
Specifications for EDDs in EU-Based AMLDs
With the rise in FinCrimes, regulators demand that financial institutions boost their levels of due diligence. Article 18 of the EU’s Fourth Anti-Money Laundering Directive (AMLD) requires enhanced due diligence for all High-Risk Third Countries. It is important to include consumers who pose a security risk, Politically Exposed Persons (PEPs), and their associates in the digital KYC verification process.
When the 6AMLD took effect in December 2020, financial institutions were under even more pressure to do more thorough due diligence. If not, customers and organizations risk legal repercussions for improperly identifying illicit financial movement. Financial institutions were scrutinized after the riots in Russia and Ukraine in 2022. In accordance with the 6AMLD standards, nations must maintain up-to-date sanction records, watchlists, and other data to limit international criminal activity.
The gambling, cryptocurrency, and trading industries are just a few examples of the high-risk fields often linked to financial institutions. They must conduct enhanced due diligence to protect these related industries from money laundering risks. In addition, regulatory agencies have established limits on the size of transactions. e-KYC and enhanced due diligence methods identify payments that exceed these limits so banking institutions can notify the appropriate authorities.
EDD Measures Put Forth by the Financial Action Task Force (FATF)
In its 40 Recommendations, FATF emphasizes the importance of financial institutions adopting a risk-based, enhanced due diligence framework. Since digitalization has taken over, these procedures have become standard with modern technology. Financial institutions will find it much simpler to comply with FATF regulations and implement EDD in KYC using this. Some concrete measures that can be taken to improve due diligence are:
- Increasing the accuracy of risk assessments by obtaining identifying data from worldwide databases and other non-traditional sources.
- Cross-checking information from other sources, such as watchlists, PEP lists, sanctions, and negative press.
- Verifying Unilateral Business Transactions and Enhanced Due Diligence Reports to Detect Malicious Intent.
- Verification of funding, confirmation of financial activity, and continuing monitoring of transactions.
- Identifying out-of-the-ordinary transactions and large payments.
- Making official submissions to relevant authorities after compiling reports of criminal activity.
Financial institutions increasingly adopt enhanced due diligence mechanisms to respond to the significant rise in financial crimes. Technologies to efficiently identify customers are improving as the regulatory environment shifts. Implementing AI-powered KYC as a service with EDD lets financial organizations grow tremendously while preventing money laundering and other crimes.