In 2021, the UK enacted stringent laws to fight money laundering, emphasising a shared responsibility between public and private sectors. The regulations don't prescribe specific actions for due diligence but require enhanced efforts compared to usual procedures.
Because of this, every company is responsible for their due diligence procedures and ensuring they comply with UK law, so they must decide exactly which measures should be taken as part of an advanced due diligence check:
High-risk customers are individuals who present a potential threat to a company's operations, often due to compliance issues, fraudulent behaviour, or cybersecurity risks.
Identifying high-risk customers involves recognising certain attributes. These include:
For instance, in the Enhanced Due Diligence (EDD) process, when identifying a PEP, companies should assess their role (e.g., congressman, politician), and tenure in such positions, and investigate their sources of funds and wealth.
Due diligence is a cornerstone of the UK’s fight against money laundering. Companies having enhanced due diligence processes and the right to perform them allow for stronger protection for our economy.
Enhanced due diligence also benefits individual companies. As part of the UK anti-money laundering regulations, the responsibility for spotting signs of money laundering is on each business.
Should a company be found to have facilitated a money laundering scheme, even accidentally, they can face harsh punishments such as fines for the business/responsible employees and jail time.
Enhanced due diligence procedures give companies an extra level of defence against this.
All anti-money laundering procedures and processes must be thoroughly documented and available to present to investigators if needed.
Enhanced due diligence (EDD) involves adopting a risk-based approach to further investigate certain clients’ identities and gather further information on their reputation and history.
EDD is only necessary with clients who have been identified as posing a high risk of involvement with financial crimes like money laundering, whereas standard due diligence is applied to everyone involved with the business (suppliers, partners, customers) who aren’t identified as high risk.
Enhanced due diligence (EDD)
Essentially what its name suggests: the process of investigating a higher-risk customer more thoroughly than you would others.
Standard due diligence
Know Your Customer (KYC) is an identity verification process that must be performed for every customer a company does business with.
Every company should conduct an assessment and identify its highest risk areas. They can then apply enhanced due diligence procedures as a preventative measure.
An example of a business deal that should involve EDD would be if the organisation or individual is from a high-risk country with sanctions against them, however, each potential business deal should be reviewed on a case-by-case basis to see if EDD is necessary.
Warning signs to look out for include:
EDD is a complex procedure but manageable when broken down into smaller tasks. Here is a sample enhanced due diligence checklist we at Red Flag Alert have created for businesses to follow:
Here's a neater version:
1. Risk Assessment: Evaluate customers based on risk factors and assign risk levels. Perform Enhanced Due Diligence (EDD) only on high-risk customers, particularly from high-risk countries.2. Verification Process: Standard Customer Due Diligence (CDD) involves verifying customer identification using documents like passports or driver’s licenses. Enhanced Due Diligence requires additional identity documentation.
3. Wealth Origin and Beneficial Ownership: Verify the source of customer wealth and establish the Ultimate Beneficial Owner (UBO) of their organization.
4. Transaction Monitoring: Analyze transaction history for inconsistencies, including values and involved parties.
5. Media Coverage Check: Investigate media coverage for adverse information about the client, particularly regarding past financial crimes or involvement with Politically Exposed Persons (PEPs).
6. On-Site Visit: Visit the client’s business address to confirm identity and match it with provided documentation.
7. Investigation Strategy Report: Document EDD plans and monitoring activities in a report, stored securely.
8. Ongoing Monitoring Strategy: Develop a strategy for continuous monitoring, looking for patterns of suspicious activity over time.
EDD requires businesses to gather further details on high-risk customers to gain a clearer picture to make an informed decision. This includes:
For companies looking for guidance, the Financial Action Task Force has a set list of best EDD practices.
For example, they suggest including the following:
Enhanced due diligence is not just a legal requirement, but every company’s duty to combat financial crime and other malicious activities.
To help businesses navigate regulations, Red Flag Alert developed an AML service in conjunction with Begbies Traynor plc and GB Group plc to assure businesses that they are compliant. We’re confident we have the simplest and most comprehensive solution in the UK market.
Take full advantage of:
By starting your free trial today, you can deploy Red Flag Alert’s AML KYC platform to manage anti-money laundering risk in a matter of seconds.