From CDD to EDD: AI’s role in every level of due diligence 

Performing due diligence is time-consuming. Even when the time and resource needed is understood to be a necessary part of a compliance team’s workload, there are often knock-on effects which are less easy to stomach.

Backlogs of due diligence checks can limit the volume of new client intake, and the time spent on researching low-risk clients diverts resources away from high-risk ones.

At a minimum, standard screening will include checking existing datasets such as PEPs, sanctions lists, and corporate records. Depending on the context, this will often cover the essentials for regulatory compliance, and wouldn’t necessarily require any advanced tools. 

But there will come instances where compliance teams need to move up to Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) and delve deeper into a client’s background and adverse media screening for a more comprehensive risk assessment.

Customer Due Diligence vs Enhanced Due Diligence

Customer Due Diligence involves a range of checks to help identify clients and ensure they are who they say they are in the client onboarding stage. It’s part of standard KYC compliance for financial companies and regulated businesses.

But when assessing individuals or organisations deemed “high risk,” a more intense level of scrutiny is required, known as Enhanced Due Diligence (EDD).

The approach a firm takes to EDD will depend on its risk appetite. Different firms may come to the same conclusion that a potential client has a moderately high-risk profile, but take a different view about what is required for EDD.

While law firms will decide for themselves how much risk they are comfortable taking on – for example through its risk committee – even a high-risk appetite shouldn’t lead a firm to take on a high-risk client without understanding their background and the reasons behind their risk factors.

Comprehensive client background research often exceeds what a compliance team can manually achieve within time constraints, which is where AI can help.

How AI can be used for CDD

The lowest level of due diligence, Simplified Due Diligence (SDD), won’t go much beyond box-ticking against specific screening criteria. So compliance teams can work through the checklists without a need to ask further questions. 

Unlike SDD, Customer Due Diligence requires a genuine curiosity in the client and their background to generate a fuller picture. This curiosity is valuable beyond client onboarding; a deep understanding of a client enables compliance teams to better identify when there are changes in that client’s behaviour which might present a risk.

For example, a client who typically conducts low-value business deals could raise suspicion if they suddenly request the transfer of a significantly larger sum. But this is where the background understanding is essential since there could be several situations in which infrequent large transactions are expected, particularly if the compliance team fully understands the nature of the industry and the client’s business.

This is where and why AI tools can enhance the compliance team’s capabilities. Such tools automate the research process far beyond “checkbox” style data from existing datasets such as PEPs and sanctions lists, and corporate records. 

Xapien’s AI tool can search the entire indexed web and understand, extract, and summarise relevant information about the client. The reports are presented in an intuitive format, resembling how a researcher would manually write, but completed in a matter of minutes.

With the research automated but without losing any nuance or interpretation, lawyers can dedicate more time to getting to know their clients which enables them to spot any abnormal behavioural cues that may arise.

How AI can be used for EDD

Researching higher-risk clients is tricky because obtaining information on the crucial factors to assess is not easily accessible. For example, details of their personal and business relationships.

What’s needed here is a process that uncovers relationships and connections, not just direct information about the client. This is where a process that incorporates AI is helpful because searching all available information, such as news stories, can identify relationships and insights such as where clients’ money flows and what connections they might have.  

Using open source research, it not only helps identify connections but also enables compliance teams to assess subtle variations in risk by considering information with context. This allows for a more nuanced evaluation, moving beyond simple flagging of risks or abnormalities without knowing the ‘why’.

In concrete terms, having a much more comprehensive and holistic view of a new customer’s business associations allows firms to make highly informed decisions about clients based on their risk appetite and values.

Using AI tools for anti-money laundering (AML) has become even more important with the increased emphasis on private companies playing a significant role in tackling money laundering and recovering assets, in the UK’s Economic Crime Plan 2.

The ability to trace client activities, relationships and money flows is greatly aided by a tool like Xapien which can digest real-time information across the entire indexed internet.

How Xapien meets CDD and EDD requirements

For higher-risk clients, it’s crucial for compliance teams to engage in a “circular” model of due diligence. In other words, to continuously collect relevant information and perform regular assessments.

While it can be frustrating for firms to repeat CDD on clients who have had long-standing relationships with them, the reality is that not taking action increases risk. Performing periodic research on existing client profiles reevaluates the risk associated with each one over time. 

The challenge comes when the due diligence process is manual—ongoing research and evaluation just isn’t possible. Particularly because manually searching databases, as opposed to consuming real-time information, won’t reveal evolving situations and relationships.

Xapien enables compliance teams to pay attention to new developments and regularly re-evaluate risks as new information about client activities and associations come to light. Using its powerful AI technology, Xapien enables compliance professionals to go beyond checking “tick box” style data from existing compliance datasets. 

It searches the entire indexed web, summarising risks in a user-friendly and intuitive way, which enables lawyers to gain a fuller view of their clients in a matter of minutes. 

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