the transformative impact of VDRs in the financial sector
Every year, more than $2tn worth of illicit cash flows into the financial system around the world, despite the efforts of financial institutions and regulators to prevent money laundering and terrorist financing. One way to fight the dirty money is to implement enhanced due diligence (EDD), a deep know your customer (KYC) process that digs into transactions that carry greater risk of fraud.
EDD is generally considered to be more thorough of security than CDD and could involve more details requests, such as sources of wealth and funds, corporate appointments, and relationships with other individuals or companies. It is also more likely to require extensive background checks, like media searches to discover any publically available or reputational evidence of criminal activity that could be danger to the bank’s business.
The regulatory bodies have guidelines on when EDD should be triggered. This is usually dependent on the nature of the transaction or customer, as well as if the person involved is politically exposed (PEP). However, it is ultimately the responsibility of each FI to make a purely subjective judgement on what triggers EDD in addition to CDD.
The key is to create effective policies that make clear to staff what EDD requires and what it doesn’t. This will help avoid high-risk situations that could lead to hefty fraud fines. It is important to have a process for identity verification in place that lets you detect red-flags such as hidden IP addresses, spoofing technologies, and fictitious identifies.