Enhanced Due Diligence Explained: Why KYC, CIP and AML are Critical in Financial Services

July 20, 2023 by Stefani Wendel

The ability to verify customer identities is essential for financial institutions for numerous reasons: regulatory requirements, for the protection of their consumers and their business, mitigating risk and more. Being able to detect high-risk customers and large transactions is a critical component of Know Your Customer (KYC) strategies. In addition to being good business practices, this type of risk mitigation is also outlined in industry regulations. In an increasingly complex regulatory environment, companies may be faced with meeting multiple KYC and Anti-Money Laundering (AML) requirements.

Actions taken to validate customers such as enhanced due diligence in KYC compliance have impacts spanning far beyond just regulatory compliance.

As with any business, bottom line and budget are primary drivers for many financial institutions. Enhanced due diligence (EDD) can positively impact a business’s bottom line by contributing to the reduction of fraud rates. And with increased security to discover potential fraudsters, organizations can protect both customers and reputational value.

What is enhanced due diligence?

EDD takes Customer Due Diligence (CDD) to the next level. Financial institutions conduct CDD to protect their organizations from financial crime. CDD is also a critical component of KYC steps to comply with AML laws. AML legislation requires financial institutions to validate their customers to ensure they aren’t part of explicitly illegal financial activity or funding terrorism. EDD is, as it sounds, a more involved form of due diligence, which encompasses additional procedures.

EDD involves determining a customer’s risk, often requiring additional information and evidence to determine their viability. While CDD is performed on all customers, EDD is reserved for high-risk potential customers.

Because EDD is often more costly and involved in terms of time and resources, a risk-based approach is recommended to flag only the instances when this additional level of validity is required.

Know Your Customer (KYC) and Customer Identification Programs (CIP)

KYC references the mandatory process of identifying and verifying a client’s identity at account opening and over the course of their relationship with a company to ensure they are the person they say they are.

KYC consists of three parts: Customer identification program (CIP), CDD and EDD. CIP requires, at minimum, that financial institutions provide four pieces of identifying information including name, date of birth, address and identification number. CDD consists of classifying the identifying information that was collected. After identifying who the client is (via CIP), CDD assesses the information to determine risk.

Enhanced due diligence in KYC

In order to establish a competent EDD program, you must improve your CIP and KYC programs. Objective, automated and efficient identity verification capabilities help you acquire profitable, legitimate customers and monitor them effectively over time to meet regulatory compliance expectations.

How can enhanced due diligence benefit your business?

Failing to comply with EDD regulations can result in countless risks for financial institutions like fines and reputational losses.

While many customers pose little to no risk, high-risk individuals must be flagged quickly and efficiently. The primary benefit of EDD is to protect both financial institutions and their customers from financial crimes such as money laundering and terrorist financing, but there are other risks as well. By mitigating potential risks associated with higher-risk customers, EDD can prevent financial institutions from incurring regulatory fines, legal action, and damage to their reputation. In turn, this ensures that customers have more trust in their financial service providers. Financial institutions can then gain a competitive advantage by offering more secure financial products and services that investors, businesses and customer demand.

Access enhanced due diligence from Experian

Experian leverages our advanced analytics, reliable data sources, and team of experts to conduct objective, full and comprehensive due diligence with confidence and certainty. Our solutions, including flexible monitoring and segmentation tools, allow you to resolve discrepancies and fraud risk in a single step, all while keeping pace with emerging fraud threats with effective customer identification software.

Improving your Customer Identification Program (CIP) and KYC programs

In conclusion, Enhanced Due Diligence in KYC, CIP, and AML are critical components of the financial services regulatory compliance framework. EDD goes beyond the standard KYC, CIP, and AML checks to mitigate risks associated with higher-risk customers. Implementing EDD can help financial institutions comply with regulatory requirements, protect against potential risks, and prevent financial crimes. Ultimately, this benefits not only the institutions but also their customers and the broader economy. It’s vital that financial institutions understand and appreciate the importance of EDD and take appropriate measures to implement it effectively.

Experian offers objective, automated and efficient identity verification solutions to help you acquire profitable, legitimate customers and monitor them over time to meet regulatory compliance expectations.

Learn more about the power of CIP and KYC solutions.