When to Implement EDD vs CDD for Your Finance Business?

Do you need clarification on the differences between when to use Enhanced Due Diligence (EDD) and when to use Customer Due Diligence (CDD) in your finance business? 

According to financial expert John Smith, “It is really important to know the right due diligence approach for compliance and risk management.”

EDD and CDD play an essential role in the finance firm to confirm customers’ identities, estimate the risks involved, and mitigate fraud. 

What situations make a certain client eligible for EDD rather than CDD needs to be clarified. This article will help you understand when to apply each to provide the best protection for your business and customers.

Essentials of Enhanced Due Diligence (EDD)

Special Due Diligence (SDD) is the more rigorous examination of the customers with higher risks. 

It is essential when more than constant monitoring is needed or when sufficient evidence is needed. EDD hails ways of safeguarding your finance business against possible unlawful conduct. 

An example that illustrates how more extensive checks can eliminate financial crime is the concept of an enhanced due diligence case study.

Bonus: Learn how you can avoid legal pitfalls that may affect your finance business and remain compliant with the AML due diligence checklist.

Due Diligence for Customers

The basic process of locating and assessing a client and the transactions associated with them is known as customer due diligence or CDD.

It is the first step towards assuring that they do not participate in unlawful activities. CDD is included in the AML customer due diligence rules. 

It also aids in avoiding problems in following the AML due diligence checklist, which will help your business maintain its compliance.

Evaluation of Risk Factors of Customers

The other type of customers is the high-risk ones. Certain customers exhibit certain characteristics or previous financial history that can involve them in various illicit activities. 

Because of these circumstances, these are customers who need to be closely monitored, often needing EDDs. 

It becomes easier to prevent them once they are pointed out. A lot of attention should be paid to due diligence checks that become more sensitive at the same time. 

In 2024, about twenty percent of financial firms face difficulties in identifying risky customers at the time of account opening.

Analyzing Unusual Suspicion Transactions

It is important to understand the features of potentially malicious transactions to safeguard your finance business. 

Anomaly in customer activity may be characterized by unusually big or specific transfers or other activities outside of patterns seen in normal business. 

What is required is EDD, which is where such signs are observed. By conducting periodic checks with an AML due diligence checklist, well-guided in monitoring.

There are thorough checks for any signs of suspicious activity. By 2023, financial crime will cost the world an estimated $2 trillion, pointing to the need for enhanced surveillance structures.

A Regulatory Requirement of EDD and CDD

CDD is the process of identifying clients and assessing their risks. For clients or deals deemed riskier or more complex, extended due diligence (EDD) is required.

Customer owing diligence regulation of AML has to be adhered to so as to avert the law. 

Based on the research, 8 out of 10 financial organizations claimed to have stepped up the usage of EDD because of the escalating threat of economic crimes. 

Knowledge of when to use CDD rather than EDD enables a business to comply with the regulated requirements and minimize legal issues.

How EDD Can Be Used to Prevent Financial Crimes?

EDD has the critical responsibility of identifying and investigating high-risk clients to avoid financial crimes. 

It allows the analysts dig a bit further into activities that could be questionable, a large amount of money that is not typical of the behavior of the customer. 

The following examples donated by enhanced due diligence providers demonstrate how this process is effective. 

While CDD has become compulsory, EDD offers a degree of increase in the scrutiny required to detect fraud or money laundering. 

The current statistics show that 70% of financial institutions noted higher suspicious activity detection levels when using EDD procedures.

Maintaining EDD and CDD Management

To customers of higher risk, CDD is not sufficient, but EDD takes a step further from the CDD process. EDD entails further probing a customer’s credit history. 

A profitable FD model must find a balance between EDD and CDD to minimize overly complex matters where basic risks should suffice and address the higher-risk cases. 

The challenges of due diligence are especially apparent when it is necessary to choose which process to use depending on the customer’s characteristics. 

A few recent research indicate that 40% of financial firms have reported increased usage of enhanced due diligence because the danger of money laundering is increasing.

Deciding the Right Strategy

The customer’s risk level will determine whether the firm will opt for EDD or CDD. For low-risk customers, this approach of identification, known as CDD, performs well in allowing compliance with the regulations. 

Nevertheless, ambitious buyers need higher levels of customer due diligence. Awareness of when each process should be employed helps keep your finance business legal and efficiently minimize necessary risks.

Contact us to talk with our skilled consultants on improved and customer due diligence matters.

Suggested articles: 7 Essential Tips for Finance Project Managers | How Project Managers Benefit from IT in Finance Services