Enhanced Customer Due Diligence

ECDD Best Practice

Lan’s Enterprise Limited Training Program

Training Objectives

What you’ll learn today:

Define clear internal criteria for identifying ECDD category customers
Demonstrate effectiveness of automated and manual ECDD systems
Apply risk-based approach to Source of Funds/Wealth verification
Implement proper documentation and monitoring procedures
Recognize key risk indicators requiring enhanced verification

Why ECDD Matters

Critical Foundations

ECDD is mandated by AML/CFT regulations when higher risk is identified

Ensures compliance with legal obligations
Prevents ambiguity through standardized definitions
Focuses resources on genuinely high-risk customers
Reduces non-compliance and oversight risks

Key insight: Clear definitions must be reflected in your Risk Assessment and AML Program

ECDD Triggers: Geographic Risk

Location-Based Risk Factors

High-risk jurisdictions: FATF-listed countries, sanctioned regions
Passport/residency status: From high-risk jurisdictions (unless also holding NZ passport/residency with NZ address)
Business connections: Trading with customers/suppliers in high-risk jurisdictions

Action: Investigate whether geographic connections warrant ECDD categorization

ECDD Triggers: Transaction Behavior

Suspicious Transaction Patterns

Complex, large, or unusual transactions
No clear economic purpose
High-volume or high-frequency transactions
Inconsistent with stated customer profile

Red flag: Transactions that don’t match the customer’s declared economic activity

ECDD Triggers: Customer Profile

High-Risk Customer Categories

Politically Exposed Persons

PEPs, their family members, and close associates

Complex Structures

Opaque corporate structures
Offshore companies or trusts

High-Risk Industries

Cash-based businesses, Fintech, real estate
High-value goods (art, cars, jewelry)
Casinos, cryptocurrency, non-profit organizations

ECDD Triggers: Additional Factors

Other Critical Risk Indicators

Product/Service Risk

Services prone to exploitation
Cash-based or virtual asset transfers

Previous History

Adverse media reports
Regulatory actions
Suspicion of financial crime involvement

Demonstrating System Effectiveness

Hybrid Automated + Manual Systems

You must prove your ECDD parameters work effectively

Record Keeping: Document all ECDD cases with rationale and mitigation steps
Reconciliation: Compare automated alerts with manual assessments
Periodic Reporting: Summarize ECDD case volumes and outcomes
Data Analysis: Track high-risk customers flagged and resolution times

System Effectiveness: Key Metrics

What to Monitor

Number of high-risk customers flagged
Percentage requiring manual ECDD review
Time taken to resolve alerts
Overlaps and discrepancies between systems

Feedback Loop: Use manual insights to fine-tune automated parameters and vice versa

Source of Funds/Wealth Verification

Risk-Based Verification Levels

How far you verify depends on risk level

Factors Influencing Risk:

Customer profile (PEPs, non-residents, high-risk industries)
Geographic risk (high-risk jurisdictions)
Transaction patterns (unusual or large)
Product/service risks (trade finance, cryptocurrencies)

Verification Level: Basic

Low-Risk Customer Approach

Rely on customer-provided information
Confirm with accessible documentation
- Payslips, bank statements
- Investment reports, proof of property sale
Use open-source information or public registries

Suitable for: Standard customers with straightforward profiles

Verification Level: Moderate

Medium-Risk Customer Approach

Request supporting documents:

Employment confirmation
Tax returns
Cross-check with third-party sources or databases

Key requirement: Look for consistency between declared SOF/SOW and transaction patterns

Verification Level: Enhanced

High-Risk Customer Approach

Detailed investigations into customer background
Verify all documents through independent, reputable sources
Analyze complex ownership structures or trust arrangements
Additional scrutiny for high-risk jurisdictions or PEPs
Maintain close monitoring of ongoing transactions

Special Case: Borrowed Funds

When Money is Borrowed

Verification becomes more complex and requires:

Copy of the loan agreement
Lender identification and legitimacy verification
Proof of loan disbursement (bank transfers, receipts)
Source of the lender’s funds/wealth
Legal/third-party verification if applicable

Borrowed Funds: Documentation Requirements

Individual Lender

Government-issued ID or passport
Proof of lender’s SOF/SOW to confirm lending capacity

Financial Institution Lender

Confirmation of registration/license
Evidence of loan disbursement

High-Risk Scenarios

Enhanced scrutiny for offshore lenders
Written declaration if lender is related party
Verification from lawyer/accountant/notary if involved

Red Flags for Borrowed Funds

Warning Signs to Watch

Loans from unregulated entities or informal agreements
Discrepancies between loan terms and client’s financial profile
Lenders or transactions tied to high-risk jurisdictions
Unclear relationship between borrower and lender
Inability to verify lender’s financial capacity

ECDD Policy Documentation

Essential Record Keeping

Document in AML Policy:

Clear ECDD criteria and definitions
Detailed procedures for identifying ECDD clients
Step-by-step handling processes

Maintain File Notes:

Customer information and risk assessment
Your reasoning for ECDD categorization
Escalation decisions and supporting documentation
System changes and process improvements

Continuous Improvement

Review and Update Process

Periodically review and update:

ECDD definitions reflecting changes in risk environment
Regulatory requirements and business operations
Automated system rules and parameters
Alignment with AML policy criteria

Goal: Ensure ECDD measures remain effective and relevant

Key Takeaways

Remember These Points

Clear Definitions Are Essential
- Define ECDD triggers in Risk Assessment and AML Program
- Apply standardized criteria consistently across organization
Demonstrate System Effectiveness
- Maintain detailed records and metrics
- Reconcile automated and manual processes regularly
Risk-Based Verification
- Match verification depth to risk level (Basic, Moderate, Enhanced)
- Pay special attention to borrowed funds and complex structures

ECDD Quick Reference Checklist

Implementation Essentials

Define geographic, transaction, and customer profile risks
Document all ECDD categorization decisions
Track system performance metrics regularly
Verify SOF/SOW according to risk level
Update policies to reflect regulatory changes
Maintain feedback loops between automated and manual systems

Video Reference

AML/CFT Webinar: Enhanced Customer Due Diligence

Link: https://www.youtube.com/watch?v=xc9UqJo64jM

Note: This video complements the training material covered in this presentation.