Enhanced Due Diligence & PEPs

When EDD Applies

Enhanced Due Diligence must be applied when the risk of money laundering or terrorist financing is assessed as higher than normal. The MLR 2017 mandate EDD in the following situations:

Politically Exposed Persons (PEPs) — domestic and foreign PEPs, and their family members and known close associates
High-risk jurisdictions — countries identified by the FATF or the firm's own risk assessment as posing elevated ML/TF risks
Complex or unusual transactions — transactions with no apparent economic or lawful purpose
Complex ownership structures — where the beneficial ownership chain is difficult to establish or involves multiple jurisdictions
Correspondent banking relationships — cross-border relationships with other financial institutions
New products or technologies — where the delivery mechanism or product features create higher risk

Magnifying glass examining financial documents - representing enhanced scrutiny

Source of Funds vs Source of Wealth

EDD requires deeper investigation than standard CDD. Two critical concepts must be understood (ComplyCube):

Source of Funds (SOF)

Where the money for a specific transaction comes from. Must be evidenced with documentation (sale contracts, bank statements, solicitor's completion letters).

"The GBP 500,000 deposit comes from the sale of a property at 42 Elm Street, completed on 15 March 2026, proceeds received from Jones & Co Solicitors."

Source of Wealth (SOW)

How the customer accumulated their overall wealth. Requires a broader narrative, supported by documentation where available (employment records, tax returns, probate records).

"The customer's wealth derives from 20 years as a senior partner at a City law firm (approx. GBP 400,000/year), inheritance in 2018 (GBP 1.2M), and investment returns."

Politically Exposed Persons (PEPs)

A PEP is defined as a person who holds (or has held) a prominent public function (MLR 2017). The definition covers three categories:

Domestic and Foreign PEPs

Heads of state, heads of government, ministers and deputy ministers

Members of parliament or similar legislative bodies

Members of supreme courts, constitutional courts, or high-level judicial bodies

Members of courts of auditors or boards of central banks

Ambassadors, charges d'affaires, and high-ranking military officers

Directors and board members of state-owned enterprises

Members of governing bodies of political parties

Directors and board members of international organisations

Family Members

Spouse or civil partner
Children and their spouses/partners
Parents

Known Close Associates

Persons with joint beneficial ownership of legal entities or arrangements with the PEP
Persons with close business relationships with the PEP
Persons who are the sole beneficial owner of an entity set up for the PEP's benefit

EDD Measures for PEPs

Senior management approval for establishing or continuing the relationship. Source of funds and source of wealth must both be established. Enhanced ongoing monitoring throughout. Review at least annually (more frequently for high-risk PEPs).

Financial documents and analytical graphs on a desk

2025 MLR Changes: EDD Narrowed

The proposed MLR amendments significantly narrow the scope of mandatory EDD for high-risk jurisdictions:

Previously: EDD was required for countries on the FATF "Call for Action" list and a broader set of jurisdictions identified in the EU's list of high-risk third countries.
2025 change: EDD is now mandated only for countries on the FATF "Call for Action" list (currently Iran, Myanmar, and the Democratic People's Republic of Korea).
Impact: Firms still conduct risk-based EDD for other high-risk jurisdictions, but it is no longer a blanket regulatory requirement.

MCO Compliance analysis notes this change aligns the UK with a more targeted, risk-based approach rather than a broad jurisdiction-based approach.

Emerging Trend

According to SmartKYC, key technology trends shaping EDD include: perpetual KYC (continuous event-driven monitoring), automated adverse media screening via NLP, biometric digital identity verification, and network analysis to map hidden PEP connections.

Step 1 of 5

Is the customer a listed company on a regulated exchange, a UK government body, or an EU/EEA public authority?

Result: Simplified Due Diligence

SDD may be appropriate. The customer falls into a low-risk category with regulated disclosure obligations.

SDD applies. Proceed with simplified checks: fewer identity verification sources, reliance on public registers for beneficial ownership, reduced monitoring frequency. Record keeping remains at 5 years. The risk assessment must document why SDD is appropriate.

Step 2 of 5

Is the customer (or any beneficial owner) a Politically Exposed Person, a family member of a PEP, or a known close associate of a PEP?

Step 3 of 5

Does the customer involve any of the following: a high-risk jurisdiction (FATF "Call for Action"), complex or opaque ownership structures, or unusual transactions with no apparent lawful purpose?

Step 4: Standard CDD

No elevated risk factors identified. Apply standard CDD.

Standard CDD applies. Verify identity using reliable, independent sources. Identify beneficial owners (25%+). Understand the purpose of the relationship. Set up ongoing monitoring. Keep records for 5 years.

Step 5: Enhanced Due Diligence

Higher-risk factors identified. Apply EDD measures.

EDD required. All standard CDD measures PLUS: senior management approval, source of funds AND source of wealth verification, enhanced ongoing monitoring, and more frequent periodic reviews.