Many acronyms related to Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance represent processes for collecting member information. One of those acronyms—EDD, or enhanced due diligence—provides additional scrutiny.

Warren Barnett, vice president of risk management at Hudson Heritage Federal Credit Union in Middletown, N.Y., discussed EDD at the CUNA BSA/AML Certification Conference with NASCUS this week in Tempe, Ariz.

EDD, along with customer due diligence (CDD), is a cornerstone of customer risk management, says Barnett. CDD is the process of performing background checks on potential members and usually occurs during member onboarding.

EDD creates a more comprehensive understanding of the risks associated with potential members.

“EDD is becoming more important as members do more business through multiple channels, especially digital channels,” Barnett says.

He says regulators, governments, and agencies use EDD programs to slow funds for criminals, terrorists, and tax cheats.

He noted that EDD should be applied in any situation where there is a higher risk of money laundering or terrorist financing.

It should also happen in certain prescribed situations, including:

• When members have unnecessarily opaque or complex business structures.
• When transactions are unusual or lack an obvious purpose.
• When members are in high-risk relationships.
• When business relationships or transactions occur with someone in a high-risk country.

Among the high-risk relationships Barnett cited:

• Cash intensive businesses.
• Money services businesses.
• Marijuana-related businesses.
• Privately owned ATMs.
• Casinos.
• Pawnshops.
• Wholesale jewelers.
• Internet gambling businesses.

Barnett suggested gathering the following information to better understand the nature and purpose of these types of relationships:

• Source of funds.
• Type of business.
• Financial statements.
• Primary location of business.
• Proximity of member’s residence.
• Description of member’s trade area, and whether member expects transactions to be domestic or international.
• Description of member’s business operations, including clients, customers, and suppliers.

Barnett says EDD entails more time and resource capacity. “It’s important to consider your credit union’s business model and your risk appetite,” he says.