Many times, when providing anti-money laundering training I have been asked “please tell me what enhanced due diligence I must do, and I shall do it”. I am sure my answer “it depends,” is not thought by the audience to be very helpful, I believe “it depends” is appropriate as an answer. In justification I point the questioner to the money laundering risks and vulnerabilities of his or her business and to those risk factors which place the client into a higher risk category.

Most practitioners are familiar with the need to undertake enhanced due diligence for high risk clients. But what do we mean by enhanced due diligence? The Financial Action Task Force has issued several sectoral guidance papers regarding the application of a risk-based approach regarded as central to the effective implementation of the FATF Recommendations.

In simple terms the rationale for the risk-based approach is applying the most amount of due diligence work towards those clients which carry the greatest amount of money laundering or terrorist financing risk. Hence the requirement for enhanced due diligence and enhanced monitoring for higher risk clients.

The understanding of money laundering and terrorist financing risks faced by financial institutions underpins the risk-based approach. FATF Recommendation 10 customer due diligence provides guidance on risk factors faced by financial institutions; organised into, client types, products and services, delivery channels, and geography.
There comes a situation whereby the client risk factors reveal that there is a high level of inherent1 money laundering and terrorist financing risk. The process of determining which enhanced due diligence actions should be applied to a high-risk client begins with understanding those component risk factors which have elevated the client risk. It is here that “it depends” comes into play.

It is important to recognize that enhanced due diligence includes both due diligence at the onboarding stage and ongoing client activity monitoring. In my experience the solution to choosing enhanced due diligence actions is often restricted to obtaining additional pieces of identification at the onboarding stage. This may not necessarily be the only option. For example, if the geographical risk factor is high because of exposure to high risk countries, additional identification documentation will on its own not help manage the elevated risk. In the case of high geographical risk enhanced due diligence and monitoring should more appropriately be focused upon assessing client rationale for the country exposure. This should be followed by focus given to monitoring of cross-border transactions projected at the time of client onboarding and which, over time will determine patterns and the realism of such activity in the context of the client.

Further, FATF Recommendation 12; Politically Exposed Persons (PEPs) has recognised the elevated money laundering and terrorist financing risk of PEPs, their close associates and family members, reflecting the increased opportunity for corruption for personal gain. Applying enhanced due diligence requires consideration of the contextual factors. Perhaps in those cases of well-known local politicians and their close associates there is only limited value in seeking a second piece of identification. However more crucially enhanced monitoring could be applied to track financial transactions to ensure that the transactions are in keeping with the profile of the politician or his close associates.

By looking at the above examples which has focused enhanced due diligence work on risk factors it is evident that there is no one size fits all. Having determined a relationship to be high risk, the contextual interpretation of the risk factors which have elevated the risk become the trigger and focus, for deeper and more frequent due diligence and monitoring at the enhanced level. The routine in obtaining an additional piece of identity does not always add enough value to the management of high-risk relationships. “It depends.”

Paul Coleman
Owner and Director
Coleman on Compliance Ltd.
February 2020
paul@colemanoncompliance.com