understanding enhanced due diligence in simple steps and its importance

understanding enhanced due diligence in simple steps and its importance

To understand deeply what enhanced due diligence you first need to know what is due diligence.

Introduction to due diligence

Due diligence is a process of gathering information and assessing the risks associated with a particular person, organization, or entity, typically in the context of a business transaction or investment. The purpose of due diligence is to ensure that all relevant information is gathered and analyzed before making a decision, in order to minimize risks and maximize the chances of a successful outcome.

Where is due diligence is applicable

Enhanced Due diligence may include a range of activities, such as reviewing financial statements, conducting background checks, assessing legal and regulatory compliance, evaluating management and personnel, and analyzing market conditions and the competitive landscape. The specific activities involved in due diligence may vary depending on the nature of the transaction or investment and the level of risk involved.

The results of due diligence are used to inform decision-making and to identify potential risks, issues, or opportunities that may need to be addressed before proceeding with the transaction or investment. Due diligence is an important aspect of risk management and is often a required step in many types of transactions and investments.

What is Enhanced due diligence?

Due Diligence (EDD) is a more rigorous form of due diligence that goes beyond the basic level of information gathering and analysis. It involves a deeper investigation into the background and activities of a person, organization, or entity, usually to identify potential risks, compliance issues, or reputational concerns.

Due diligence is often used in situations where there is a higher risk of financial crime, such as money laundering, terrorist financing, corruption, or fraud. It may involve additional measures such as site visits, interviews, background checks, or third-party verification.

Enhanced due diligence is commonly used in the financial industry, particularly for high-risk clients or transactions, but it can also be applied in other industries such as real estate, legal services, or healthcare. The objective of EDD is to provide a more comprehensive and informed assessment of the risk associated with a particular entity and to ensure that appropriate measures are in place to mitigate those risks.

Due diligence in banking

Due diligence in banking is an important process that banks use to evaluate the risks associated with various activities and transactions and to ensure that they comply with regulatory requirements. Banks are subject to a range of regulations, such as anti-money laundering (AML), know-your-customer (KYC), and customer due diligence (CDD), which require them to conduct due diligence on their customers and transactions.

In the context of banking, enhanced due diligence may involve activities such as:

KYC/CDD: Banks are required to verify the identity of their customers and to collect information about their business activities, sources of funds, and other relevant information.

Transaction monitoring: Banks monitor transactions to detect unusual or suspicious activities that may indicate money laundering, fraud, or other criminal activities.

Credit risk assessment: Banks assess the creditworthiness of borrowers to determine the likelihood of default and to mitigate the risk of losses.

Compliance review: Banks review their compliance with regulations and internal policies to identify any gaps or areas of non-compliance.

Vendor due diligence: Banks may conduct due diligence on their vendors or third-party service providers to ensure that they meet the bank’s standards for security, privacy, and compliance.

The objective of due diligence in banking is to identify potential risks and to take appropriate measures to mitigate those risks. This helps to protect the bank’s reputation, financial stability, and compliance with regulations.

Importance of CDD in KYC

  • According to a survey by EY in 2020, 98% of the respondents reported that they had experienced challenges in conducting due diligence, with the most common challenges being a lack of data and difficulty in assessing risks.
  • A study by Thomson Reuters in 2018 found that 42% of respondents reported spending more than 20 hours per week on due diligence activities, and 10% reported spending more than 40 hours per week.
  • A report by the Association of Certified Fraud Examiners (ACFE) in 2020 found that 42% of fraud cases involved the perpetrator providing false or misleading information during due diligence.
  • A survey by Dun & Bradstreet in 2021 found that 61% of the respondents had delayed or canceled a business deal due to concerns uncovered during enhanced due diligence.
  • According to a report by McKinsey & Company in 2020, the use of technology in due diligence can reduce the time required by up to 80%, and can improve the accuracy and completeness of the analysis.

Sonia Awan