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Thursday, January 26, 2023

Enhanced Due Diligence in Banking –  Managing Highly-Risky Transactions in the Sector

In the age of digitization, the banking industry is experiencing many complex challenges while onboarding its clients. There is always the risk of mistakenly onboarding a criminal, jeopardizing security protocols. Banking service providers want a robust system that can effectively and powerfully execute client identity verification. Enhanced Due Diligence in banking helps institutions observe and regulate large-scale transactions while assessing potential risks. It can efficiently verify the credentials of stakeholders, traders, clients, and high-risk entities. The EDD process also facilitates financial service providers complying with KYC/AML standards to evade permanent bans/monetary fines.

Enhanced Due Diligence Process

Enhanced Due Diligence is more comprehensive than Customer Due Diligence (CDD). It is a mechanism in agreement with KYC guidelines to scan high-risk consumers reliably. The essential difference between EDD and CDD is that it happens under strict AML regulations, while customer due diligence performs official identity verification of clients. 

Role of FATF Regarding High-Risk Financial Exchanges

The recommendations by FATF guide that a Risk-Based Approach (RBA) is crucial while tackling high-risk consumers; the same criteria apply to highly unsafe financial transactions. In this situation, banking service providers must adopt Risk-Based Approaches (RBA) to examine money laundering incidences and terrorism financing cases. The industry must perform under AML/CFT regulations to analyze risks linked with every financial trade. Following the 40 protocols of FATF, enhanced due diligence in banking ensures flexibility to financial organizations regarding utilizing their capital and strategies to tackle high-risk parties.

Procedure Behind Enhanced Due Diligence in Banking System 

EDD is a perpetual process of observing customer behavior that takes place under a team of compliance professionals. EDD comprises a proper set of operations which are as follows:

  • Risk-Based Approach (RBA)

RBA allows banking service providers to organize their clients depending on the risk associated with their profiles. The industry also helps in specific evaluations, extracting meaningful insights from information. Undoubtedly, the review process is facilitative for organizations. 

  • Enhanced Due Diligence Checklist

Professionals prepare an EDD toolkit for implementing KYC/AML regulations on clients’ profiles during this phase. It has a PEP, high-risk nations, suspicious activities, and foreign clientele lists.

  • Examining the Source of Funds (SOF) and UBOs

This step clarifies which sources of funds are legitimate and illegitimate. Only finances from legal sources should get into financial organizations. An efficient evaluation process demands that clients reveal all of their financial and non-financial capital. If there are any inconsistencies, professionals stop the review process immediately. 

In the case of B2B transactions, clients must give data about subsidiaries and Ultimate Beneficial Ownership (UBOs). This step is crucial for efficiently evaluating UBOs in the banking industry. 

  • Ongoing Transaction Monitoring

The personal credentials of clients can change anytime. Consumers can partake in suspicious behaviors. Professionals should create a comprehensive profile of financial exchanges. Details such as time taken for transactions, nature, and the total amount of current/ past connections are also thoroughly inspected.

  • Survey of Local Market Credibility

Sometimes clients’ information does not create a clear picture of brand image in the psyche of local customers. In this situation of highly risky exchanges, Enhanced Due Diligence in banking system also examines the brand’s credibility in local markets by evaluating social media sites and news broadcasting. 

  • Comprehensive Address Authentication

Enhanced Due Diligence in banking (EDD) is an in-depth review process. Addresses of risky clients get scrutinized by on-premises visits. Sometimes, onsite visits are not feasible because of physical limitations. In such types of cases, digital address verification must take place. The system collects information from clients’ bank statements, utility bills, and driving licenses of clients.

Increasing Credibility of the Banking Sector

Constructing a positive brand image is critical for a competitive advantage in the market. Activities showing Corporate Social Responsibility (CSR) are one approach. The second way is Enhanced Due Diligence in banking. A robust monitoring system disseminates a positive message of care and responsibility. In this regard, concerned business partners promise loyalty and trust as they know their capital is in expert hands. 

The Final Verdict

The importance of enhanced due diligence in banking system can never be neglected because of the increasing possibility of high-risk exchanges. The review process is comprehensive in the identity authentication procedure to guarantee accuracy and originality. Moreover, the EDD system facilitates banking service providers in keeping their credibility with their clientele. More essentially, it is very effective against financial fraud. Enhanced due diligence in banking process ensures adherence to KYC/AML regulations. To such a degree, banking businesses can catch high-risk customers beforehand and stop them from exacerbating the situation.



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