5 Reasons Enhanced Due Diligence is Important for Companies
Imagine if you have something very valuable that could generate profit if leased to those in need. However, along the way, some individuals borrowing this item pose a high risk of damaging or losing it. You would agree that as the owner of the item, it's crucial to meet with them and conduct periodic checks to prevent such risks. Well, this illustration can depict Enhanced Due Diligence for companies, especially financial service providers. Enhanced Due Diligence is a scrutiny procedure imposed on customers with high-risk profiles while receiving funds.
According to Financial Services Authority Regulation No. 12/POJK.01/2019, high-risk customers are those who, based on their background, identity, and history, are deemed to have a high risk of engaging in activities related to money laundering and/or Terrorism Financing. Terrorism financing, in this case, refers to the use of wealth for terrorism activities, directly or indirectly.
Criteria for High-Risk Customers
There are several criteria a customer can meet to be categorized as high risk, all of which are stipulated in the regulations. These include:
- Politically Exposed Persons (PEPs), who are individuals entrusted with public authority as officials of state institutions or influential members of political parties.
- Transactions with other parties or foreign countries deemed high risk.
- Transactions that do not match the transaction profile. Anomalies may arise from transaction frequency differing from usual patterns and the distance between transaction locations and the customer's residence or business premises.
- Customers located in high-risk countries or regions.
- Terrorists, and many other criteria outlined by government regulations.
5 Benefits of Enhanced Due Diligence
Enhanced Due Diligence (EDD) shares the same basic concept with Customer Due Diligence (CDD), which involves verification and identification activities. However, EDD goes deeper and is more specific because customers meet one of the aforementioned criteria. Let's explore why EDD is crucial for companies:
- Risk Management: One of the risks of operating financial institutions is the possibility of being harmed by irresponsible customers. Effective risk management, particularly in prevention, can be achieved through EDD. Companies can assess risks based on four factors: the customer, geographical area, products/services/transactions, and distribution networks.
- Monitoring Special Transactions: Special transactions with specific nominal amounts require supervision. According to regulations, any customer intending to transact amounts exceeding IDR 100 million must undergo CDD procedures. Since EDD is an advanced procedure after CDD, it becomes a method for monitoring.
- Preventing Fund Misappropriation: Countries aim to prevent criminal activities, especially money laundering and terrorism financing. Through EDD, anomalies leading to prohibited actions can be detected more quickly, thus preventing and minimizing criminal activities.
- Maintaining Customer Relationships: EDD doesn't always imply that high-risk customers are negative entities. While they may pose higher risks based on their backgrounds, there's a possibility they aren't violating state regulations. Therefore, EDD procedures support the relationship between you as the fund provider and them. You can use CDD to initiate this positive relationship, and EDD will enhance it for long-term benefits.
- Facilitating Decision Making: Decisions regarding high-risk customers must be based on valid and reliable data. Interview data during EDD greatly influences decision-making. In some cases, EDD results or reports serve as the primary benchmark for determining transactions, subsequent loan disbursements, and more.
In broader terms, EDD can expedite decision-making processes concerning customers. This effectively reduces the company's workload and allows more time for business development. The company can focus on improving overall customer service.
Enhanced Due Diligence is a perfect approach for companies to communicate with high-risk customers. Without a negative assessment, companies can effectively manage risk. To streamline the EDD process, third parties like Brick can assist in verifying basic data and information. This makes in-depth interviews more effective and efficient if basic information is well-managed.
