Due diligence is a critical process that businesses undertake to gather information about potential clients, partners, or investments. This process helps businesses to identify risks and make informed decisions. However, when the risks are higher or when dealing with certain clients or partners, businesses may need to undertake enhanced due diligence (EDD) to gain a deeper understanding of the risks and ensure compliance with regulatory requirements.
In this article, we will explore the difference between due diligence and enhanced due diligence.
What is Due Diligence?
Due diligence is a process of investigation and analysis that businesses undertake before entering into a business relationship with a client or partner. The objective of due diligence is to identify any potential risks, such as financial, legal, operational, or reputational, associated with the business relationship. The scope of due diligence can vary based on the nature of the business relationship, the level of risk involved, and the regulatory requirements.
Due diligence typically involves gathering information about the potential client or partner, reviewing financial statements, conducting background checks, and analysing the legal and regulatory compliance of the business. The information gathered during due diligence helps businesses to make informed decisions about whether to proceed with the business relationship or not.
What is Enhanced Due Diligence?
Enhanced due diligence (EDD) is a more thorough and comprehensive version of due diligence. It is typically used in cases where the risks associated with a business relationship are higher, such as when dealing with politically exposed persons (PEPs), high net worth individuals (HNWIs), or in high-risk industries such as gaming or financial services.
The objective of EDD is to gain a deeper understanding of the risks associated with the business relationship and to ensure compliance with regulatory requirements. EDD involves a more in-depth analysis of the potential client or partner, including their background, reputation, and financial history. It may also include the use of specialised databases and external sources of information.
The key difference between due diligence and EDD is the level of scrutiny and analysis involved. Due diligence is a standard process that businesses undertake for all business relationships, whereas EDD is a more intensive process that is reserved for high-risk situations.
At FACT, a leading provider of UK and global Due Diligence services, we offer a comprehensive suite of EDD, including third-party, AML, KYC, PEP, and risk profiling.