Enhanced Due Diligence and High-Risk Customers
Domain 4 tests enhanced due diligence: identifying higher-risk customers, applying measures that go beyond standard CDD, and documenting the decision to accept or reject the relationship.
Risk factors
Customer risk factors include PEPs, cash-intensive businesses, and complex ownership. Country risk covers FATF call-for-action jurisdictions, corruption indices, and sanctions exposure. Product and service risk covers private banking, correspondent accounts, prepaid products, and virtual assets. Channel risk covers non-face-to-face onboarding and introducers.
EDD measures
EDD can include obtaining additional identity information, corroborating source of wealth and source of funds, obtaining senior management approval, conducting enhanced ongoing monitoring, and reviewing the relationship more frequently. EDD is additive; it does not replace standard measures. For PEPs, FATF Recommendation 12 requires risk-based systems, senior management approval, source of wealth and funds checks, and enhanced monitoring. The definition of PEP includes foreign PEPs, domestic PEPs, and international organisation PEPs, plus family members and close associates.
High-risk categories
Correspondent banking requires understanding the respondent bank's AML programme and ownership. Private banking clients need source-of-wealth analysis. Money service businesses and cash-intensive businesses need scrutiny of expected activity. De-risking - exiting whole categories - is discouraged; risk-based management is preferred.
Worked example
A private bank is asked to onboard a client who is a government minister in a country with a high corruption score. He wants to deposit USD 3 million from the sale of a family business. Correct reasoning: he is a PEP, so the file needs senior management approval before onboarding, verification of identity and beneficial ownership, and corroboration of source of wealth - sale contracts, tax records, and bank statements tracing the proceeds. Source of funds for the deposit must be separately documented. Enhanced monitoring should be set for the first year. If documentation cannot corroborate the wealth, decline or escalate.
Traps that cost marks
Treating EDD as simply collecting more documents; assuming every PEP is a criminal; applying simplified measures to high-risk customers; and failing to document who approved the relationship.