Enhanced Due Diligence (EDD): When and How It Applies under L.4557/2018
Standard CDD is not sufficient for all clients. Exactly when does the law require Enhanced Due Diligence, and what does it add to the process?
What Is EDD and How Does It Differ from CDD?
Standard Customer Due Diligence (CDD) covers the basic level of control: identification, verification, understanding of the activity, risk assessment. Enhanced Due Diligence (EDD) adds: • Deeper investigation of source of wealth and source of funds • Documentation beyond the standard level • More frequent monitoring • Senior management approvals Under Article 20 L.4557/2018, EDD is mandatory in specific situations — it is not a choice.
When Is EDD Mandatory?
L.4557/2018 defines clear categories that require EDD: PEP clients: Politically exposed persons (domestic or foreign) High-risk countries: Clients or transactions involving countries on the FATF black/grey list (Afghanistan, North Korea, Iran, etc.) Correspondent banking (for financial institutions): Not relevant for most professionals. Based on risk scoring: If the risk assessment assigns a client a "High" score, EDD is de facto necessary even if they do not fall into the above categories. Unusual transactions: Any transaction that has no apparent economic rationale.
What EDD Requires in Addition
Beyond the standard CDD documents, EDD requires: Source of Wealth: How did the client acquire their overall wealth? Documentation: tax returns, inheritance/gifts (deeds), business activity (financial statements). Source of Funds: Where do the funds for this specific transaction come from? Documentation: bank statements, invoices, sale contracts. Senior management approval: Written approval to begin or continue the engagement. Enhanced monitoring: Increased frequency of transaction reviews and file updates.
EDD Documentation: What Your File Must Contain
An EDD file must include: ☐ Justification for EDD: why it was deemed necessary (PEP, high risk score, risk country, etc.) ☐ Source of wealth documentation (documents + analysis) ☐ Source of funds documentation (for each significant transaction) ☐ Senior management approval (written, dated) ☐ Results of PEP/sanctions list checks (dated and sourced) ☐ Schedule of next update (no later than 12 months) The EDD file is the first thing that will be requested in a supervisory audit for high-risk clients.