Sliding into EDD

And here is my third and (for the moment) final post on the UK’s draft new money laundering regulations.  One little phrase jumped out at me in the consultation document: “EDD is a sliding scale”.  The point is made in reference to PEPs (which I discussed last time), but it struck me that this aspect of EDD is often overlooked: people think that there is one level of EDD that comes into play the moment a client falls into a high risk category.

The best analogy is perhaps with the speeding offence.  Looking at the speeding sentencing guidelines here in the UK, you will see that there are degrees of driving exuberance.  If you’re in a 30mph zone and you do more than 30 but less than 40, it’s one band, then from 41 to 50 it’s another and so on.  So if your client is only mildly high risk – say he is a citizen of a high risk jurisdiction, but everything else about him is completely standard – then you can apply a lower level of EDD than you would to a client who is a PEP in a high risk jurisdiction, wanting to set up a convoluted corporate structure in order to service his new Bitcoin and arms dealing empire.

Indeed, this idea of varying levels of EDD is supported by the JMLSG Guidance Notes for the UK financial sector, in a paragraph (4.51) that is unchanged in the revised version of the GN that has recently been put out for consultation (there’s a few more blog posts in the making): “Where the risks of ML/TF are higher, firms must conduct enhanced due diligence measures consistent with the risks identified…  Examples of EDD measures that could be applied for higher risk business relationships include…” and then a menu of options (not a prescriptive list) is given.  It may be tempting to have one category of EDD, but this is neither a proportionate reaction to risk, nor required by legislation.

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2 Responses to Sliding into EDD

  1. CDWOS says:

    interesting analogy……..Not completely convinced just at the moment (a bit slow today!). We have in Britain’s Tropical isles had the risk based approach (which is part and parcel of what you are discussing) fully implemented and interpreted for quite some time as has our “once a PEP always a PEP” and ALL PEPs present a higher ML risk and are rated high so as you say by definition you are automatically looking at EDD but the real question as you allude to is what level. In the Funds Admin business and others that I have worked we developed the “Direct” and Indirect” PEP. “Direct” is a controller of the relationship (can direct and instruct) and may or may not have a personal financial stake in whatever product you offer by contrast the “Indirect” PEP has no personal financial interest in the product or in control of the relationship and simply happens to be present on the Board. In these instances (BP comes to mind with an array of directors 40+ many of whom are PEPs but none of whom were involved in the relationship in any way) we would identify and background check the “Indirect” PEPs using public domain in my BP example and as they are in the public domain we could obtain their home addresses as well as their business addresses. They would be entered on our database for regular screening to make sure they weren’t being naughty but as I have conveniently used a Public Company they would disappear from the Board very quickly if they didn’t behave. The nuances are fun(!) and pretty nearly endless as I’m sure you must remember from your many trips to see and talk to us…….

  2. You are quite right, CDWOS: there are some reading this blog (in “Britain’s tropical isles”!) for whom PEP CDD is bread and butter business, and you have – understandably – spent much more time than most refining your approach. Thanks for sharing the concept of the “direct” and “indirect” PEP, as others may find this very useful.
    Best wishes from Susan

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