Bank diligence with an emphasis on thorough investigation: A necessary practice for financial institutions to ensure they minimize risks and avoid potential financial losses or legal issues.

Bank diligence with an emphasis on thorough investigation: A necessary practice for financial institutions to ensure they minimize risks and avoid potential financial losses or legal issues.

In today's interconnected world, financial institutions play a vital role in safeguarding the global economy from illicit activities such as money laundering, corruption, terrorism financing, and sanction violations. One of the key strategies they employ is Enhanced Due Diligence (EDD), an advanced customer due diligence process aimed at high-risk customers [1][2][3][4].

EDD goes beyond standard due diligence by conducting a deeper investigation into a customer's profile and activities, tailored to mitigate the higher risks they pose. The process is designed to ensure financial institutions remain compliant with Anti-Money Laundering (AML) regulations and protect themselves from involvement in illicit activities [1][3][4].

The core steps in the EDD process involve:

1. Collecting additional information about the customer, such as their occupation, the volume of assets, and beneficial ownership details [1][3].
2. Obtaining detailed insight into the intended nature of the business relationship and the reasons for intended or performed transactions [1].
3. Verifying the source of funds and/or wealth to ensure legitimacy [1][3].
4. Seeking senior management approval before commencing or continuing the business relationship [1].
5. Applying enhanced and continuous monitoring by increasing controls, scrutinizing transaction patterns that may indicate suspicious behaviour, and frequently updating customer information and risk profiles [1][3][4].
6. Performing adverse media and sanction screening more rigorously [3][4].

EDD is mandatory for customers identified as higher risk, including politically exposed persons (PEPs), customers from high-risk jurisdictions, correspondent banking relationships, and entities located in sanction countries [3].

Last year alone, regulators levied nearly $1 billion in fines against financial institutions that failed to comply with customer due diligence regulations [6]. In 2015, Ali Al Duais, who owned the Michigan money services business King Mail & Wireless Inc., was assessed a civil money penalty by the Financial Crimes Enforcement Network (FinCEN) for violating the Bank Secrecy Act [5].

EDD for financial services goes beyond identifying and verifying potential business customers and builds a risk-based framework around know your customer (KYC) practices [7]. Adverse media reports about a customer can alert banks to place greater scrutiny on future transactions [8].

Financial institutions should also consider automation tools to accelerate and improve KYC review processes [9]. Consulting with experts can help financial institutions improve their EDD policies and identity-verification processes [8].

It is crucial for financial institutions to identify and verify the identity of any natural persons, known as 'beneficial owners', of legal entities to comply with Customer Due Diligence (CDD) regulations [10]. EDD builds upon CDD requirements by introducing risk-based assessments [11].

In summary, EDD is a risk-based, ongoing process that ensures more comprehensive verification, scrutiny, and monitoring to manage and mitigate risks associated with financial crime effectively [1][4][5]. By implementing EDD, financial institutions can help maintain a secure and transparent financial system for all.

References:

[1] Financial Action Task Force (FATF), Recommendation 12 - Customer Due Diligence: https://www.fatf-gafi.org/topics/customer-due-diligence/

[2] European Banking Authority, Guidelines on the customer due diligence and ongoing monitoring requirements for banks: https://eba.europa.eu/-/eba-publishes-guidelines-on-customer-due-diligence-and-ongoing-monitoring-requirements-for-banks

[3] Financial Crimes Enforcement Network (FinCEN), Advisory - Enhanced Due Diligence for Bank Secrecy Act Purposes: https://www.fincen.gov/resources/statutes-regulations/advisories/advisory-enhanced-due-diligence-bank-secrecy-act-purposes

[4] United Nations Office on Drugs and Crime, The role of financial institutions in preventing money laundering and terrorist financing: https://www.unodc.org/unodc/en/financial-crime/resources/publications/2004/the-role-of-financial-institutions-in-preventing-money-laundering-and-terrorist-financing.html

[5] Financial Crimes Enforcement Network (FinCEN), Press Release - Ali Al Duais Assessed a $1.1 Million Civil Money Penalty: https://www.fincen.gov/news/news-releases/al-duais-assessed-1-1-million-civil-money-penalty

[6] Financial Action Task Force (FATF), Press Release - FATF identifies jurisdictions with strategic deficiencies in their AML/CFT regimes: https://www.fatf-gafi.org/publications/fatfgeneral/documents/fatf-identifies-jurisdictions-with-strategic-deficiencies-in-their-aml-cft-regimes.html

[7] International Monetary Fund, Enhanced Due Diligence for Financial Services: https://www.imf.org/en/Publications/CRR/Issues/2016/12/16/Enhanced-Due-Diligence-for-Financial-Services-47849

[8] Financial Action Task Force (FATF), Guidance for a Risk-Based Approach to Sanctions: https://www.fatf-gafi.org/topics/virtual-assets-and-virtual-asset-service-providers/documents/guidance-for-a-risk-based-approach-to-sanctions.html

[9] KYC 360, The Role of Technology in KYC and AML Processes: https://www.kyc360.com/the-role-of-technology-in-kyc-and-aml-processes/

[10] Financial Action Task Force (FATF), Guidance on Beneficial Ownership: https://www.fatf-gafi.org/topics/transparency/documents/beneficial-ownership-guidance.html

[11] European Banking Authority, Guidelines on the risk-based approach for the customer due diligence and ongoing monitoring requirements for credit and financial institutions: https://eba.europa.eu/-/eba-publishes-guidelines-on-the-risk-based-approach-for-the-customer-due-diligence-and-ongoing-monitoring-requirements-for-credit-and-financial-institutions

1. In addition to safeguarding the financial system, practicing responsible finance can also contribute to an individual's personal wealth management and sustainable living.
2. Technology plays a significant role in today's financial institutions, not only in enhancing due diligence processes but also in automating know your customer (KYC) reviews.
3. By implementing technology, financial institutions can efficiently streamline the EDD process, resulting in a more efficient business and better personal growth for its employees involved in career development.
4. Educational resources on digital transformation and data-and-cloud-computing can help financial institutions stay current with such advancements, ensuring they maintain an edge over competitors.
5. The increased scrutiny of transactions through EDD can also aid sports analysts in gathering data for sports-related financial analysis, particularly in the NBA, helping teams make more informed basketball decisions for their teams' growth.
6. Home-and-garden enthusiasts can also benefit from these advancements since many financial institutions offer loans and mortgages to fund home improvements, promoting a comfortable personal lifestyle.
7. The wealth management sector has also seen the impact of technology, empowering investors to make informed decisions through fintech platforms, fostering a culture of self-development and learning.
8. Furthermore, financial literacy and education-and-self-development workshops can help individuals better manage their personal finance, paving the way for more fulfilling career-development opportunities.
9. The future thus lies in combining the critical aspects of KYC, EDD, and financial crime prevention with an understanding of the global economy, technology, and education, ensuring a secure and sustainable financial ecosystem for all.

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