Author: Niall Hearty
12 February 2024
4 min read
The Solicitors Regulation Authority reported that 83% of its 29 enforcement outcomes featured insufficient customer due diligence.
High-end money laundering threatens the UK’s national security, and it is crucial that financial and professional services remain on guard against illicit finances derived from criminal activity. Enhanced due diligence is one of the ways to tackle this.
Enhanced Due Diligence (EDD) is the most rigorous level of the Know Your Customer (KYC) checks. Also known as Know Your Client (KYC), regulated firms must carry out these checks on any new client, customer or business relationship.
The checks are in place to protect the business from money laundering or terrorism financing, by verifying that a customer is who they say they are, and that the source of their funds is legitimate.
‘Regulated firms’ must comply with the due diligence checks under the Money Laundering Regulations.
Regulated firms are defined by the regulations and include accountancy, financial services businesses, estate agents, high value dealers (including art market participants) and solicitors.
Whether or not a regulated firm must conduct enhanced due diligence (EDD), rather than simplified due diligence (SDD) or customer due diligence (CDD) depends on the circumstances of the customer or client.
SDD, CDD and EDD are the three levels of Know Your Customer checks that a regulated firm must carry out on any new client, customer or business relationship.
Regulated firms are required to take a ‘risk-based approach’ to CDD. Which level of due diligence a firm carries out will depend upon the level of deemed risk of money laundering or terrorist financing posed by the new client.
In all circumstances firms must monitor the account activity to make sure that the risk profile of the customer does not change.
Under Regulation 27 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) a business must carry out CDD measures when:
Enhanced due diligence is conducted on any new business or customer that is deemed to be ‘high risk’ in terms of money laundering or terrorism financing.
A ‘high-risk’ customer is:
As the name suggests, a firm has to carry out the same checks that it would for CDD, but with a few additional measures.
First you must verify the client’s identity based on a reliable independent source (such as a passport). You need a document that includes the customer’s name, photograph, residential address and date of birth. For EDD you might also search online databases, or even look at social media to gather information on their identity.
You must identify if there is a beneficial owner who is not the client. If so, you must take reasonable measures to verify the identity of the ultimate beneficial owner. You need to understand the ownership and control structure of a legal person, trust, company, foundation or similar legal arrangement.
Then you need to take steps to better understand the background, ownership and financial situation of the customer, and other parties to the transaction.
The other steps a firm must take when conducting EDD include:
Failure to comply with EDD when it is required can lead to fines from the regulator. A firm may also face financial losses due to fraud perpetrated on the business. If checks are not rigorous, a firm can suffer the impact of reputational damage by association with money laundering.
Given the risks of getting EDD wrong, regulated firms should be investing in getting it right. Here is a list of suggested best practice for improving your EDD processes:
Due diligence is a responsibility that cannot be taken lightly. Not meeting due diligence obligations can be damaging to a business and can lead to serious legal difficulties. As the consequences of such failings can be so harmful, it is important to know exactly how and when to conduct due diligence.
For many in business, this can be a daunting prospect. If that is the case, specialist advice should be sought.
At Rahman Ravelli, we have in-depth experience of all aspects of due diligence. Our lawyers are on hand to offer the relevant expertise to ensure that anyone in business can meet their obligations and function in a legally compliant way, free from the risk of potentially damaging difficulties.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.