Businesses utilize the practice of due diligence to assess and mitigate risks associated with specific transactions or commercial partnerships. Through due diligence analysis, companies ensure they are not unwittingly supporting or engaging in criminal activities. However, conducting comprehensive due diligence for every deal or business connection can be time-consuming and expensive.
Differences Between SDD and EDD
Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD) are two approaches that businesses can adopt to comply with Anti-Money Laundering (AML) regulations. Despite both being aimed at assessing and mitigating risks, these processes differ in the level of scrutiny and information requirements they entail.
SDD is a streamlined process utilized when the risks associated with a specific transaction or business relationship are deemed low. It involves gathering essential information about the customer or transaction, such as their name and contact details. SDD may also include verifying the customer’s identity and cross-referencing their name against sanction lists.
In contrast, EDD is a more comprehensive process implemented when the risks associated with a particular transaction or business relationship are high. This entails collecting more detailed information about the customer or transaction, such as the source of funds, business partners, and ultimate beneficiaries. EDD also involves enhanced monitoring of the customer’s activities and may necessitate periodic reviews of the relationship.
The level of scrutiny differs significantly between SDD and EDD. EDD is a more extensive and time-consuming process that requires businesses to conduct a deeper investigation into the risks associated with a transaction or business relationship. This approach is reserved for detecting and reducing potential hazards in situations that are highly risky. On the other hand, SDD is a more streamlined process used when the risks associated with a transaction or business relationship are lower. While SDD may involve some degree of verification and checks, it is not as exhaustive as EDD.
SDD Process and its Requirements
The process of Simplified Due Diligence (SDD) involves gathering essential information about the customer or transaction, including name, address, and contact details. Here are some key requirements and steps associated with the SDD process:
1. Determine Eligibility: The first step in SDD is to assess whether the transaction or business relationship qualifies for simplified due diligence. Eligibility criteria may consider the type of customer or transaction, the amount of money involved, and the level of risk associated with the relationship.
2. Collect Basic Information: Once eligibility is established, the next step is to gather basic information about the customer or transaction. This may include obtaining the customer’s name, address, and contact details.
3. Verify Identity: In certain cases, businesses may be required to verify the customer’s identity. This verification process could involve requesting identification documents or conducting background checks.
4. Check Sanction Lists: Another crucial requirement of the SDD process is to cross-check the customer’s name against sanction lists to ensure they are not involved in any illicit activities.
5. Document the Process: It is essential to thoroughly document the SDD process to ensure compliance with AML regulations. This documentation may involve maintaining records of the information collected, the results of identity verification and sanction checks, and any other pertinent details.
Overall, the SDD process offers a simplified approach to conducting due diligence, enabling businesses to save time and resources. However, SDD should only be employed when the risks are low, and all eligibility criteria and requirements are met.