What Is Enhanced Due Diligence?

Enhanced due diligence (EDD) examines the specific risks that require greater scrutiny within a relationship or transaction. Its scope is defined by the exposure being assessed: the same subject may warrant different enquiries for different decisions.

The scope behind the label

EDD can refer to measures undertaken within a regulated customer relationship or to a broader commercial assessment. The two may draw on related information, but they are not interchangeable. A review of commercial credibility does not, by itself, discharge a regulated firm's obligations.

In the financial-crime context, the FCA describes enhanced measures in relation to identified risk and the circumstances of the relationship. A research brief is one part of that response; approval, monitoring and other applicable controls sit within the client's own framework. FCA Financial Crime Guide, section 3.2.

For a commercial brief, precision comes from identifying the proposition on which the decision depends. Establishing the beneficial interests behind an acquisition vehicle is a different task from assessing a prospective partner's claimed experience. Combining them under one heading should not obscure their separate evidential requirements.

Evidence matched to the proposition

A document may be reliable without establishing everything attributed to it. Accounts, for example, may support a statement about a company's reported financial position without establishing the origin of the funds committed to a particular transaction. The distinction matters when information is summarised for an approval decision.

Source of wealth and source of funds also address different propositions: the development of a person's wealth and the origin of the money involved in the relationship or transaction. Evidence relevant to one can inform the other, but a conclusion should specify which question it supports.

The useful unit of assessment is therefore the material claim, not the number of records obtained. A finding can be well supported, partly supported, contradicted or unresolved. Each describes the evidence more accurately than a single undifferentiated risk label.

Adverse information in context

An allegation, a disputed account and a concluded finding carry different weight. Their relevance also depends on attribution, timing and connection to the present decision. An older matter may remain material; a recent report may add little if it repeats an untested claim.

The assessment should accommodate credible explanations as well as adverse interpretations. A discrepancy may reflect a change of entity, an imprecise description or an incomplete record. Recording an explanation does not establish it, but excluding it can distort the conclusion just as readily.

The outcome of enhanced review

The review brings together the evidence supporting the proposed relationship, material findings and any questions requiring resolution. Each follow-up point should identify the information needed and its significance for the decision.

The report should also distinguish the information position at its cut-off date from any assumptions about future conduct. Evidence supporting a transaction today is not a permanent assessment of the subject. Where the decision changes materially, the relevance of the earlier conclusion may change with it.

These principles concern the substance of EDD. The choice between routine and enhanced review is addressed separately in standard versus enhanced due diligence. Carratu's Enhanced Due Diligence service sets out the available support and reporting scope.