EDD and CDD are two terms that are commonly used in the field of finance and banking. While EDD stands for Enhanced Due Diligence, CDD stands for Customer Due Diligence. Both terms are essential in ensuring that financial institutions comply with regulatory requirements and prevent financial crimes. These include money laundering and terrorism financing. In this article, we will explore the difference between EDD and CDD and their importance in the financial industry.
Customer Due Diligence (CDD)
CDD is the process by which financial institutions verify the identity of their customers. Then, they assess the risks associated with them. The objective of CDD is to ensure that institutions do not engage in financial transactions with individuals or entities involved in criminal activities. These include money laundering, fraud, or terrorism financing. CDD involves collecting information about the customer. This includes their name, address, date of birth, and identification documents such as passports and driver’s licenses.
Financial institutions use a risk-based approach to determine the level of CDD required for each customer. This means that the level of scrutiny applied to a customer’s identity verification and risk assessment depends on their risk profile. For example, customers deemed high-risk, such as politically exposed persons (PEPs). Or those from high-risk jurisdictions, require a more thorough CDD process than low-risk customers.
Enhanced Due Diligence (EDD)
EDD is a more comprehensive and detailed version of CDD. It involves a higher level of scrutiny and goes beyond the standard identification and risk assessment procedures. EDD typically applies to high-risk customers or transactions that are particularly complex or involve unusual patterns of behavior.
EDD may include additional measures such as obtaining additional information about the customer’s source of funds or wealth, conducting background checks on the customer or their associates, and assessing the customer’s reputation and business practices. In some cases, institutions may also conduct site visits to the customer’s place of business to verify the information provided.
EDD is important. It helps financial institutions identify potential risks and red flags that may not be detected through a standard CDD process. This allows them to mitigate risks and prevent financial crimes such as money laundering, terrorism financing, or bribery and corruption.
Difference between EDD and CDD
The primary difference between EDD and CDD is the level of scrutiny and detail involved. CDD is a standard procedure that financial institutions must undertake for all customers to verify their identity and assess their risk profile. EDD, on the other hand, is an enhanced version of CDD. It applies to high-risk customers or transactions that require a higher level of scrutiny.
Another difference is the scope of information that financial institutions collect during the process. CDD typically involves collecting basic information such as the customer’s name, address, and identification documents. EDD, however, may involve collecting additional information such as the customer’s source of funds, business practices, and reputation.
Finally, the frequency of the process is also different. CDD is typically a one-time process that financial institutions undertake when a new customer opens an account or engages in a financial transaction. EDD, however, may be an ongoing process that institutions undertake periodically to ensure that the risk profile of the customer has not changed significantly.
Enhanced due diligence is a way for customers to show KYC compliance.
Enhanced Due Diligence (EDD) is a type of KYC, or know your customer. EDD is used by financial institutions to show that they are complying with government regulations on money laundering and terrorist financing.
The purpose of KYC is to ensure that financial institutions know who they’re dealing with when it comes to customers and potential clients. This prevents criminals from using the banking system as a means of transferring funds illegally.
EDD can be done in many different ways. Some companies will ask for additional documentation from their clients while others may simply require more frequent reporting from existing customers.
In conclusion, both EDD and CDD are essential processes that financial institutions must undertake to comply with regulatory requirements and prevent financial crimes. While CDD is a standard procedure that is required for all customers, EDD is an enhanced version that is applied to high-risk customers or transactions. EDD involves a higher level of scrutiny and goes beyond the standard identification and risk assessment procedures. By understanding the differences between EDD and CDD, financial institutions can better manage risks and prevent financial crimes.