What is Enhanced Due Diligence (EDD)?
Enhanced Due Diligence is a more rigorous approach to verifying a merchant or client’s identity and business activities. While standard due diligence might rely on basic checks like company registration or financial information, EDD goes much further, diving into a merchant’s history, ownership structure, and potential connections to high-risk entities or activities. Think of it as detective work before a merchant ever processes a single transaction.
Some key aspects of EDD include:
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Identifying Ultimate Beneficial Owners (UBOs): Uncovering who really owns or controls the business.
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Financial and business background checks: A thorough investigation of past financial behavior and current business activities.
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PEP and sanctions screening: Checking for politically exposed persons (PEPs) or merchants on global sanctions lists.
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Negative media searches: Scouring the web for any association with criminal activity or scandals.
EDD provides the tools to make informed decisions — ensuring that only trustworthy, legitimate merchants make it past the onboarding gate.
EDD vs. KYC: Understanding the Differences
While both Enhanced Due Diligence (EDD) and Know Your Customer (KYC) are crucial for fraud prevention, they serve distinct purposes. KYC is primarily focused on basic identity verification, ensuring that customers are who they claim to be. This involves checking identification documents and confirming the legitimacy of a business. In contrast, EDD is applied when there is a higher risk associated with a merchant or client. It involves a more detailed investigation into a business’s history, ownership, and connections to high-risk entities.
KYC provides the foundational verification needed to start a business relationship, while EDD offers a deeper dive to uncover potential red flags that KYC might not reveal. Both are essential: KYC lays the groundwork for legitimacy, while EDD addresses more complex risk factors that could indicate higher potential for fraud or illicit activities. Utilizing both processes ensures a comprehensive approach to risk management, helping to prevent bad actors from entering the system in the first place.
The Data Behind Enhanced Due Diligence
The importance of EDD cannot be overstated. According to recent data from the Association of Certified Financial Crime Specialists (ACFCS), businesses that fail to perform adequate due diligence are 56% more likely to experience financial fraud or sanctions violations¹. Worse, those violations often come with hefty regulatory fines. In 2023 alone, banks across the globe faced more than $15 billion in penalties for anti-money laundering (AML) failures, many of which could have been mitigated through stronger EDD measures².
Additionally, research from LexisNexis Risk Solutions found that companies with robust onboarding and due diligence procedures experienced 32% fewer cases of fraud than those without³. The numbers speak for themselves — comprehensive EDD isn’t just about ticking boxes. It directly correlates to risk mitigation and financial protection.
Who Needs Enhanced Due Diligence?
EDD isn’t something reserved for just any business. It’s typically applied to those classified as higher risk — whether due to industry, geography, or business model. For instance, companies in sectors like cryptocurrency, real estate, or financial services are more likely to require EDD due to the potential for fraud, money laundering, or ties to sanctioned entities⁴. Likewise, businesses operating in jurisdictions known for lax regulatory standards or corruption are often flagged as higher risk.
Beyond high-risk sectors, any company handling large sums of money or cross-border transactions might trigger the need for enhanced checks. A seemingly legitimate merchant today could have undisclosed ties to illicit activity that only EDD can uncover.
When Should EDD Be Applied?
EDD is typically performed during the onboarding phase — before a new merchant is integrated into the financial system. But EDD isn’t a “set it and forget it” process. It needs to be dynamic, evolving alongside merchants. A shift in ownership, entering new markets, or launching new products are all potential triggers for revisiting EDD.
Regulators worldwide are tightening the rules. In 2020, the European Union’s Fifth Anti-Money Laundering Directive (5AMLD) mandated enhanced due diligence measures for high-risk third countries and cryptocurrency exchanges⁵. Global regulatory standards are rising, and companies that don’t adapt risk falling behind — and incurring significant fines.
Why EDD is Critical to Fighting Fraud
Enhanced Due Diligence is more than just a compliance tool. It’s a proactive defense that can stop bad actors from ever gaining a foothold in your ecosystem. When performed correctly, EDD can uncover hidden risks that could lead to fraud, money laundering, or even terrorism financing.
The risks are substantial. A report by PwC noted that 47% of global businesses experienced fraud in the past two years, with average losses totaling $42 billion⁶. Many of these fraud cases stemmed from weaknesses in the onboarding process — a gap that EDD can fill.
When risks are identified upfront, organizations avoid the costly repercussions of dealing with fraud after it occurs. EDD provides the peace of mind that you’re working with legitimate merchants, mitigating potential legal, financial, and reputational damage.
The Bigger Picture: A Holistic Approach to Fraud Prevention
While my experience has taught me the value of EDD during the onboarding process, I’ve also come to realize that no single tool can fully combat financial crime. Enhanced Due Diligence is powerful, but it’s most effective when viewed as part of a holistic fraud prevention strategy.
The fraud landscape is evolving rapidly. What we’re seeing today in onboarding or transaction monitoring is just the tip of the iceberg. The best fraud-fighting tools are those that work together — integrating EDD with real-time transaction monitoring, machine learning algorithms, and human oversight. According to Accenture, companies that implement a multi-layered fraud prevention strategy see a 70% reduction in fraud attempts, compared to those that rely on single-point solutions⁷.
By combining tools and looking at the entire payments cycle — from onboarding to transaction monitoring to reporting — companies can build a robust defense system. Fraud prevention isn’t just about reacting to bad actors once they’re inside; it’s about stopping them before they ever get in.
In the end, fraud prevention isn’t just about technology. It’s about understanding patterns, thinking like a bad actor, and using every tool at your disposal to create a safer, more secure payments environment. Whether you’re onboarding merchants or monitoring transactions, every phase of the payment process matters — and all the pieces fit together to form the larger puzzle of fraud prevention.
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Footnotes:
[¹]: Association of Certified Financial Crime Specialists (ACFCS), Financial Crime Risk and Mitigation Report 2023.
[²]: Global Anti-Money Laundering Penalties 2023 Report.
[³]: LexisNexis Risk Solutions, “The True Cost of Financial Crime Compliance Study,” 2023.
[⁴]: Financial Action Task Force (FATF) Guidance on Risk-Based Approach to High-Risk Sectors.
[⁵]: European Union Fifth Anti-Money Laundering Directive (5AMLD) Implementation Guide.
[⁶]: PwC Global Economic Crime and Fraud Survey 2023.
[⁷]: Accenture, “Multi-Layered Fraud Prevention: The Future of Financial Crime Defense,” 2023.
