Skipping Enhanced Due Diligence for High-Risk Clients or Jurisdictions

Listen to this Article

Introduction
Not all property transactions carry the same level of risk. Some clients or deals involve complex ownership structures, unusual payment methods, or connections to higher-risk jurisdictions.

Enhanced Due Diligence (EDD) is a critical process designed to investigate high-risk clients and transactions more thoroughly, verifying sources of funds, ownership structures, and any red flags that go beyond standard checks. Skipping EDD leaves firms vulnerable to financial crime and operational exposure.

What Enhanced Due Diligence Involves
EDD typically includes:

- Verifying the Ultimate Beneficial Owner (UBO): Ensuring the real individual controlling the funds is identified, particularly when transactions involve companies, trusts, or offshore structures.

- Assessing Source of Funds and Wealth: Collecting detailed documentation for transactions with unusually large sums, cash payments, or funds from higher-risk regions.

- Risk Scoring and Client Profiling: Evaluating clients against risk indicators such as politically exposed persons, involvement in high-risk sectors, or connections to jurisdictions with weaker financial regulations.

- Ongoing Monitoring: Continuously tracking high-risk clients for unusual activity, not just at the point of onboarding.

Why Firms Skip EDD
Common reasons include:

- Pressure to Close Deals Quickly: High-value or competitive transactions may tempt staff to bypass thorough checks.

- Assumption That Standard KYC Is Enough: Some firms assume verifying ID and basic documentation suffices, regardless of the client’s risk profile.

- Limited Resources: Smaller firms may not have dedicated compliance teams or tools for in-depth investigations.

- Overconfidence in Existing Processes: Relying on generic templates or past procedures without updating for new risks can lead to blind spots.

Potential Consequences of Skipping EDD
Even without focusing on fines, failing to perform enhanced checks can result in:

- Undetected Suspicious Transactions: Illicit funds may enter the property market without detection.

- Operational Risk: Oversights can disrupt transactions or trigger internal audits.

- Reputational Damage: Clients and partners may lose confidence in a firm perceived as negligent.

Best Practices for High-Risk Transactions

- Implement a Risk-Based Approach: Classify clients and jurisdictions as low, medium, or high risk to guide the depth of due diligence.

- Invest in Compliance Resources: Ensure staff have the training and systems to conduct detailed investigations.

- Document All Findings: Record verification steps, source of funds, and any additional monitoring measures.

- Regularly Review Risk Assessments: Update client risk profiles as new information emerges.

- Promote a Compliance-First Culture: Encourage staff to prioritize thorough due diligence over rapid deal closure.

Conclusion
Skipping enhanced due diligence is a subtle but serious risk in real estate. By adopting a structured, risk-based approach, maintaining thorough records, and continuously monitoring high-risk clients, firms can safeguard their operations and build trust with clients and partners. Vigilance and proactive investigation are essential to secure responsible and sustainable property transactions.

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.