In today’s world, financial transactions are becoming increasingly complex and risky. Due to the growing number of frauds and financial crimes, it has become imperative to undertake enhanced due diligence before engaging in any financial transaction.
Enhanced Due Diligence (EDD) is an extensive investigative process that involves a deeper level of scrutiny of individuals and entities before engaging in financial transactions. It goes beyond the normal due diligence process to identify and assess potential risks associated with the transaction. This process helps to ensure that the transaction complies with legal and regulatory requirements and that there is no involvement with criminal activities such as money laundering, terrorist financing, and fraud.
The need for enhanced due diligence is a response to the growing number of financial crimes that have occurred over the years. The financial markets have undergone several changes since the 2008 financial crisis, which has led to increased regulation and compliance requirements. According to a report by Thomson Reuters, 56% of financial institutions expect their compliance budgets to increase in the next year, indicating that there is a growing recognition of the importance of compliance measures.
In the past, due diligence was primarily focused on verifying the identity of customers and their sources of income. However, with the advent of new technologies and the increasing sophistication of financial crimes, this is no longer sufficient. Today, EDD includes additional measures such as identifying the ultimate beneficial owners of a company, assessing the reputation of individuals and entities, and monitoring transactions for any suspicious activity.
One of the key historical alterations that led to the need for enhanced due diligence was the 9/11 terrorist attacks. Following the attacks, there was a heightened awareness of the potential for financial crimes to be used to fund terrorist activities. This led to the introduction of the USA PATRIOT Act, which required financial institutions to undertake enhanced due diligence when dealing with high-risk customers and transactions.
Another key event that led to the need for enhanced due diligence was the 2008 financial crisis. The crisis highlighted the importance of monitoring financial transactions and identifying potential risks associated with them. As a result, there was increased regulation of the financial sector, and financial institutions were required to undertake more stringent compliance measures.
Statistics show that the implementation of enhanced due diligence measures has had a positive impact on reducing financial crimes. According to a report by the Financial Action Task Force (FATF), the implementation of customer due diligence measures has resulted in a significant reduction in the number of suspicious transactions reported to financial intelligence units. In addition, a report by the International Monetary Fund (IMF) found that countries with stronger anti-money laundering and counter-terrorist financing frameworks had a lower incidence of financial crimes.
Enhanced due diligence is particularly important in high-risk sectors such as the cryptocurrency industry. According to a report by CipherTrace, in 2020, over $10 billion worth of cryptocurrency was stolen through various forms of fraud, including hacking, phishing, and Ponzi schemes. The anonymity of cryptocurrency transactions makes it more difficult to identify the parties involved, making it easier for criminals to engage in illegal activities. Therefore, it is crucial that financial institutions undertake enhanced due diligence when dealing with cryptocurrency transactions.
Enhanced due diligence is important in financial transactions because it helps to identify potential risks associated with the transaction and ensures compliance with legal and regulatory requirements. The growing recognition of the importance of compliance measures and the historical alterations in conjunction to the markets has led to the implementation of more stringent compliance measures. These measures have had a positive impact on reducing financial crimes, and it is crucial that financial institutions continue to undertake enhanced due diligence in high-risk sectors such as the cryptocurrency industry. As the financial markets continue to evolve, it is important that compliance measures keep pace with the changes and adapt to the new risks and challenges that emerge. This requires on-going investment in technology and training to ensure that financial institutions can effectively identify and mitigate risks associated with financial transactions. Additionally, collaboration between financial institutions, regulatory bodies, and law enforcement agencies is crucial to ensure that compliance measures are effective in combating financial crimes and protecting the integrity of the financial system.