Enhanced Due Diligence and High-Risk Relationships
When and how to intensify
Enhanced due diligence applies where risk is higher: politically exposed persons (PEPs), customers in high-risk or grey/black-listed jurisdictions, correspondent banking relationships, private banking and high-value accounts, complex ownership structures, and products enabling anonymity.
Know the PEP definition: individuals entrusted with prominent public functions - domestic, foreign, or international - plus their family members and close associates. The controls: senior management approval, source of wealth and source of funds verification, and enhanced ongoing monitoring. Distinguish source of funds (where the specific money came from) from source of wealth (how the person's overall fortune was built) - a classic exam trap.
Understand correspondent banking risk: nested accounts, payable-through accounts, and the need to understand the respondent's AML controls. Know shell banks - prohibited relationships in most regimes.
EDD measures commonly include: additional identity and ownership verification, independent corroboration of documents, site visits, adverse media and sanctions screening, more frequent reviews, and lower monitoring thresholds.
Traps and rule of thumb
Traps: assuming PEP status ends when the person leaves office (risk persists, often for a defined period or indefinitely depending on jurisdiction); confusing source of funds and source of wealth; and believing EDD is a one-off exercise at onboarding (it is ongoing). Another trap is treating all high-risk relationships as prohibited - most are permitted with enhanced controls.
Rule of thumb: EDD = more information, more verification, more seniority, and more monitoring. If the risk cannot be mitigated to within appetite, the relationship should be declined or exited.
Worked example: A foreign minister opens a private banking account funded by a large transfer from an offshore company. EDD requires senior approval, identification of the offshore company's beneficial owners, verification of source of wealth and source of funds for the transfer, and enhanced monitoring - not automatic rejection, but a documented decision.