Explained: Enhanced Due Diligence For Cryptocurrency

The number of fraudulent activities is increasing day by day in the Crypto and blockchain world. For the same reason, it becomes mandatory now to protect the business from fraudsters and financial criminals. To stop these activities in a business we need to adopt the Anti-Money Laundering (AML) compliance in our day-to-day activities of the business.

In the past, we have seen multiple cases of fraud relating to cryptocurrency and blockchain technologies. This is the main reason why the process of Know Your Customer (KYC) comes into the picture. In this process, businesses and financial institutions do the KYC of their customers so that they can fully comply with the laws of Anti-Money Laundering (AML) to reduce the possibility of becoming a victim of fines.

There are two approaches to doing the KYC. The first one is CDD which is Customer Due Diligence and the second one is EDD. Click here to know more

What are CDD and EDD in cryptocurrency?

As discussed above CDD and EDD both are a type of due diligence process done by financial institutions and business organizations to comply with the laws of Anti-Money Laundering.

  • In the case of CDD business is supposed to do due diligence on their customers. Whereas, EDD is one step away from CDD to ensure customers are properly verified by the organizations or financial institutions.
  • Customer Due Diligence is a verification process that is important to avoid any financial issues connected to Anti-Money Laundering, CTF (Counter-Terrorist Financing), or poor creditworthiness of any customers. Whereas, Enhanced Due Diligence is done on customers who have high net worth or are flagged as high-risk as they can carry out risky and huge transactions.
  • In the case of CDD business is supposed to do the verification majorly on the personal documents of the customers such as Aadhar cards, etc. Whereas, in EDD (Enhanced Due Diligence) businesses are doing their verification on customers who have fallen under the high-risk category. This includes the individual who provides non-approved identification.

When should an EDD review take place?

It is not necessary to qualify for Enhanced Due Diligence. Businesses are advised to do the EDD review once the individuals become their customers.

In the process of Enhanced Due Diligence, organizations continue to do business with their customers but at the same point in time, they also follow their actions in a close manner.

Organizations must be ready to terminate the relationship with their customers immediately, if they are not in agreement to do an EDD review or if they pose a high risk to the business.

After the review of Enhanced Due Diligence takes place, the compliance officers of BSA will submit their report to the Board of Directors.

How do you know an EDD review is needed?

Well, it has been discussed earlier that the review of EDD is done to reduce the risk of financing terrorists and money laundering in the field of blockchain and cryptocurrency. But the question is how to identify the customers who possess high risk?

We can scrutinize any customers of the cryptocurrency business by checking their transaction volume, activity, profile, etc.

These are the three signs of customers who need an EDD review –

  • Customers who execute multiple transactions amount to $10,000 or more.
  • Customers who execute at least 5 or more transactions in a month.
  • Customers who provide a non-approved state identification.

If anyone in the cryptocurrency business notices any fraudulent or suspicious activity they are advised to report it to the BSA Compliance Officer. Automatically this will help them to save their cryptocurrency businesses from any fraud or criminal activities.

How to apply EDD practices in a cryptocurrency business?

Anyone who is doing their business in crypto or blockchain space must have a third party who is responsible for risk assessment. So that the third party can determine the risk attached to any customers of the company.

Every cryptocurrency business possesses different types of risk, no business possesses the same level of risk. The main factor which determines the risk factor attached to any business is location, business, product, and the service of the business.

Ultimately, the policies and procedures of your business will be more effective at protecting your business from any risk attached to your customers.