Enhanced Due Diligence (EDD) is a critical compliance requirement under the Prevention of Money Laundering Act (PMLA), 2002, designed to safeguard the financial system against money laundering and terrorism financing. It applies when customers, transactions, or jurisdictions pose higher risks, demanding stricter scrutiny beyond routine checks.
What Is Enhanced Due Diligence?
While Customer Due Diligence (CDD) is the standard process of verifying customer identity, EDD goes deeper. It requires banks, financial institutions, and intermediaries to:
* Conduct thorough background checks on high-risk customers such as Politically Exposed Persons (PEPs), non-residents, and entities from sensitive industries.
* Verify the source of funds and wealth, ensuring they originate from legitimate channels.
* Monitor transactions on an ongoing basis to detect suspicious or unusual activity.
Regulatory Requirements under PMLA
Under Indian law, EDD is mandatory in specific cases, including:
* High-risk customers (PEPs, sanctioned entities, non-residents).
* Large-value transactions, cross-border remittances, and foreign exchange dealings.
* Transactions involving countries with weak AML/CTF frameworks or those listed on the FATF grey or black lists.
As per Section 12AA of PMLA, financial institutions must:
* Retain all EDD records and supporting documents for at least five years.
* Refrain from executing specified high-risk transactions unless EDD is completed satisfactorily.
Key Steps in Enhanced Due Diligence
A robust EDD framework involves:
* Collecting additional documents and performing independent checks using reliable databases.
* Verifying source of funds/wealth through bank statements, tax filings, and independent validation.
* Identifying Ultimate Beneficial Owners (UBOs) in complex ownership structures.
* Ongoing monitoring to flag transactions inconsistent with a customer’s known profile.
Best Practices for Financial Institutions
To ensure compliance and reduce risks, banks and intermediaries should:
* Review customer profiles more frequently for high-risk accounts.
* Escalate monitoring and reporting whenever red flags are detected.
* Maintain secure and detailed records for the statutory period.
* Train staff to recognize and implement EDD measures effectively.
📊 Summary Table: CDD vs EDD
| Aspect | Customer Due Diligence (CDD) | Enhanced Due Diligence (EDD) |
| Purpose | Standard identity verification and risk assessment | In-depth checks for high-risk customers, transactions, and jurisdictions |
| When Applied | For all customers during onboarding and normal transactions | For PEPs, sanctioned entities, non-residents, large transactions, FATF-listed countries |
| Regulatory Basis | PMLA and RBI KYC Master Directions | Section 12AA of PMLA; FATF guidelines |
| Key Steps | Collect ID proof, address proof, PAN, KYC details | Collect additional documents, verify source of funds/wealth, identify UBO, enhanced monitoring. |
| Monitoring | Periodic review of customer activity | Continuous and more frequent monitoring of high-risk accounts |
| Record-Keeping | Maintain KYC records for 5 years | Retain detailed EDD records for at least 5 years |
| Best Practices | Ensure accurate onboarding and basic transaction monitoring | Staff training, red-flag escalation, secure record-keeping, independent checks |
✅ Conclusion: Enhanced Due Diligence (EDD) is not just a compliance checkbox but a critical defense mechanism against money laundering and terrorism financing. By strengthening CDD with EDD where required, financial institutions protect both their operations and the integrity of the financial system.
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