Standard Customer Due Diligence (CDD) is the baseline for verifying client identities. But what happens when a client presents a higher risk of money laundering or terrorism financing? That is when Enhanced Customer Due Diligence (ECDD) is required.
When is ECDD Required?
Under Australian law, reporting entities must apply ECDD in specific situations as outlined in the AML/CTF Rules. According to AUSTRAC's ECDD guidance, these situations include:
- When the customer, a beneficial owner, a person acting on the customer's behalf, or a person on whose behalf the service is received is a foreign Politically Exposed Person (PEP). Domestic and international organisation PEPs require ECDD where the customer's ML/TF risk is high.
- When the customer (or a beneficial owner, or a person acting for or benefiting from the service) is physically present in, or formed in, a high-risk jurisdiction for which the FATF has called for enhanced due diligence.
- When the reporting entity determines, based on their AML/CTF Program risk assessment, that the ML/TF risk is high.
- If a Suspicious Matter Report (SMR) has been or is required to be submitted.
Key Components of an ECDD Program
ECDD is not just a checkbox; it requires senior management involvement and deeper investigation into the client's background.
- Obtain Senior Management Approval: Providing a designated service to, or continuing a business relationship with, a foreign PEP (or a high-risk domestic or international organisation PEP) requires senior manager approval. For other high-risk customers, escalate to senior management as your AML/CTF policies require.
- Establish Source of Wealth (SoW): For foreign PEPs and high-risk domestic or international organisation PEPs, you must establish source of wealth on reasonable grounds; for other high-risk customers, you must do so where it is relevant to the nature of their risk. Document evidence where possible.
- Establish Source of Funds (SoF): Determine the origin of the specific funds involved in the transaction or relationship.
- Enhanced Ongoing Monitoring: High-risk clients must be monitored more frequently and with deeper scrutiny to ensure their risk profile hasn't deteriorated further.