Enhanced Due Diligence (EDD) is a heightened level of customer verification and monitoring applied to customers who present a higher risk of money laundering or terrorist financing. EDD goes beyond standard Customer Due Diligence (CDD) by requiring additional verification, a deeper investigation of the source of funds and wealth, and senior management approval. Under FICA, accountable institutions must apply EDD to certain categories of high-risk customer.
When Does EDD Apply?
FICA requires EDD in the following circumstances:
- Politically Exposed Persons (PEPs). Any customer who is a PEP — a person who holds or has held a prominent public function — requires EDD. This includes foreign PEPs, domestic PEPs, and their family members and close associates.
- High-risk jurisdictions. Customers from or transacting with jurisdictions identified as high risk by the FATF or the FIC require EDD. South Africa itself is currently on the FATF grey list, which affects how foreign institutions treat South African counterparties.
- Complex ownership structures. Customers with complex or opaque ownership structures — including trusts, shell companies, and nominee arrangements — require EDD to identify the ultimate beneficial owner.
- Unusual or high-value transactions. Transactions that are unusually large, unusually complex, or have no apparent economic purpose may trigger EDD.
- High-risk business activities. Customers operating in high-risk industries — such as cash-intensive businesses, gambling, arms dealing, or precious metals — may require EDD.
What Does EDD Involve?
EDD involves all the elements of standard CDD, plus additional measures proportionate to the identified risk:
- Obtaining additional identification documents to verify the customer's identity
- Investigating and verifying the source of funds and source of wealth
- Obtaining senior management approval before establishing the business relationship
- Conducting more frequent and more detailed ongoing monitoring
- Obtaining information on the purpose and intended nature of the business relationship
EDD for PEPs
Politically Exposed Persons are a specific category of high-risk customer for which FICA mandates EDD. For PEPs, accountable institutions must: obtain senior management approval before establishing the business relationship; take reasonable measures to establish the source of wealth and source of funds; and conduct enhanced ongoing monitoring of the business relationship.
The EDD obligation for PEPs continues even after the person leaves their public position. The period for which EDD must be maintained after a person leaves a PEP position should be specified in the institution's RMCP.
Frequently Asked Questions
- What is the difference between EDD and standard CDD?
- Standard CDD involves identity verification, beneficial ownership identification, and understanding the business relationship. EDD adds deeper source-of-funds investigation, senior management approval, and more intensive ongoing monitoring. EDD is applied to higher-risk customers.
- Does EDD mean an institution cannot do business with a PEP?
- No. EDD does not prohibit business with PEPs. It requires additional scrutiny and senior management approval before establishing the relationship. Institutions can and do maintain business relationships with PEPs, provided they apply appropriate EDD.
- How long must EDD be maintained for a PEP?
- FICA requires EDD for PEPs for as long as the business relationship continues. The period for which EDD must be maintained after a person leaves a PEP position should be specified in the institution's RMCP. The FIC recommends continuing EDD for a period after the person leaves their position.
- What is source of wealth and how does it differ from source of funds?
- Source of funds refers to the origin of the specific funds used in a transaction. Source of wealth refers to the origin of the customer's total wealth — how they accumulated their assets over time. EDD for high-risk customers typically requires investigation of both.
- Can EDD be conducted electronically?
- Yes. The same electronic verification methods used for standard CDD can be used for EDD, supplemented by additional checks such as adverse media screening and enhanced database searches.