Enhanced Due Diligence – Guidelines, Procedures, and Requirements in Singapore

Did you know that each year, approximately 2 trillion USD in illicit cash flows via the global financial system, regardless of regulators and governments working to uphold stability through improved cooperation, new laws, and stronger enforcement?

Singapore, being a massive financial market, is more susceptible to such crimes. Thus, FATF (Financial Action Task Force) and MAS (Monetary Authority of Singapore) have increased regulatory scrutiny to mitigate these risks. This is where enhanced due diligence comes into play.

EED is an advanced risk analysis procedure that involves collecting and analyzing data on high-risk business transactions to detect and reduce financial crimes, including money laundering and terror financing.

Read on to explore everything you need to know about enhanced due diligence in Singapore, its requirements, and more.

What is enhanced due diligence?

EED is a comprehensive and rigorous level of background check used to assess potential risks linked with clients, business relationships, or transactions. The process involves:

• In-depth background check
• Verification of beneficial ownership
• Analyzing complex transactions
• Assessing high-risk sectors

Thus, EDD in compliance not only offers assurance that such risks are detected and reduced but also protects businesses from reputational damage and financial crimes.

The following table explains the difference between due diligence and enhanced due diligence:

When is enhanced due diligence required?

According to recommendation 10 of its 40 recommendations, the FATF mandates that all members should implement customer due diligence measures within their domestic AM/CFT legislation.

Moreover, FATF, under its 19^th recommendation, also mandates EDD for business dealings and transactions involving organizations, financial institutions, and individuals from countries flagged by the FATF.

Enhanced due diligence is usually required for individuals, business dealings, and transactions that pose higher-than-normal risks of financial crimes. Here is a list of some of the enhanced due diligence requirements.

1.    Politically exposed persons

Individuals with prominent public positions or their close associates often pose a higher risk due to the potential for abuse of power and corruption.

2.    Cross-border deals involving high-risk jurisdictions

Business dealings or transactions with countries having weak anti-money laundering and combating terrorism financing controls require additional scrutiny to prevent such risks.

3.    Complex ownership structures

Businesses that are difficult to identify as the ultimate beneficial ownership because of their non-transparent structure, shell business, and multilayered structure necessitate EDD.

4.    Large, unusual, or crypto-based transactions

Transactions that usually deviate from a customer’s regular profile, like high-value transactions or cryptocurrencies, are regarded as higher risk due to anonymity and cross-border reach.

5.    Regulatory triggers from MAS and international standards

The monetary authority of Singapore (MAS) and FATF guidelines may require EDD when the following red flags are identified.

• Suspicious transaction pattern
• Adverse media reports
• Sanctions exposure

By implementing EDD, businesses in Singapore not only ensure compliance but also mitigate exposure to risks, including the following.

• Legal risks
• Operational risks
• Reputational risks

A data room for due diligence can be handy when dealing with high-stakes and risky transactions.

Enhanced due diligence procedures and guidelines

Implementing robust enhanced due diligence procedures is important for businesses operating in high-risk industries.

The following explains the step-by-step breakdown of the enhanced due diligence process.

Key parameters for enhanced due diligence

Understanding the parameters for enhanced due diligence is key to employing a risk-based approach to compliance. Such parameters help with early detection of red flags, and businesses can meet regulatory parameters to avoid financial risks.

Overview of risk-based parameters and red flags

Hence, monitoring such parameters will help organizations to apply the correct level of due diligence and stay compliant with local and international frameworks.

Enhanced due diligence checklist

Using a well-structured enhanced due diligence checklist provides businesses with a clear roadmap and ensures that no important step is skipped. The EDD checklist consists of the following key components:

The reviews ensure that the client’s risk profile is updated and any changes are identified and addressed properly.

Enhanced due diligence examples

Businesses more often than not encounter situations requiring EDD, especially when they are dealing with profiles of high-risk clients. The following are some of the enhanced due diligence examples.

• One enhanced due diligence example involves Politically Exposed Persons (PEPs). A PEP is any individual who holds a prominent position and has been given a public responsibility, along with their family members or close associates.

PEPs are often considered high-risk owing to their influential position, as they are more likely to be involved in corruption or bribery. Due to this very nature, EDD is immediately triggered whenever a PEP encounters any financial institution or a legal firm. EDD then rigorously performs identity verification, a complete screening for adverse media, and an in-depth investigation of funds, wealth, and transactions. All of this is done to establish the legitimacy of funds.

• The Panama Papers are one of the real-life examples that highlight the importance of enhanced due diligence. The global investigations reported that high-risk individuals and businesses used complex structures to hide wealth and avoid taxes. Moreover, institutions that were involved with such high-risk profiles without EDD suffered great consequences through reputational damage and hefty fines.

Enhanced due diligence forms and documentation

An enhanced due diligence form serves as the central record for collecting and verifying information about high-risk customers or business relationships.

Key components of an EDD form include client information, business activities, risk assessment, and beneficial ownership. Supporting documents required for EDD are critical for cross-verification of information provided on the form.

Common supporting documents include the following.

1. Proof of identity. For individuals, a government-issued ID (Passport, NIC). For entities, it might involve corporate registration documents, articles of incorporation, and board resolutions.
2. Source of wealth. Audited financial statements, tax returns, property deeds, inheritance documents, or legitimate business contracts proving the origin of overall wealth.
3. Business registration details. Documents proving legal existence and registration of a business entity, including certificates, licenses, and documentation of directors and shareholders.

An enhanced due diligence report sample often uncovers the depth of investigation, including:

• Summaries of adverse media findings
• PEP screening results
• Detailed analysis of complex ownership structures

These reports are essential for showing compliance with regulators.

Virtual data rooms (VDRs) in enhanced due diligence

Dealing with large volumes of data and sensitive information in EDD makes secure data management the utmost priority. This secure data management is ensured by virtual data rooms.

VDRs are highly secure repositories used for storing, managing, and sharing sensitive data during due diligence processes or transactions. Here is what virtual data rooms offer in EDD.

1. Centralized document access for due diligence

VDRs provide a single and secure location for all the sensitive data and documents that are needed for EDD. This not only simplifies the internal and external audits but also ensures that all the sensitive information and documents are organized and readily available. During M&A due diligence, VDRs aid potential buyers in reviewing and processing the legal and financial documents.

2. Version control

Another feature of virtual data rooms is version control. This feature tracks every modification made and ensures that the latest and accurate version is always used when required.

3. Secure upload of evidence and records

Information such as financial transactions, identity documents, source of funds evidence, and ownership data is highly sensitive and requires secure upload and storage of data. Online data rooms provide encrypted channels for the transfer and storage of sensitive and critical data.

Why VDRs are essential for compliance teams and cross-border business deals

For Compliance teams, VDRs are essential as they reduce errors, aid in audit trails, and streamline overall workflow.

In cross-border business deals, multiple clients/parties from different jurisdictions are involved. They require secure and efficient sharing of sensitive data, which makes VDRs’ availability critical. VDRs ensure seamless collaboration and maintain data integrity across geographical boundaries.

Moreover, data room providers such as Ideals offer the safest data rooms with premium security and collaboration features, improving productivity.  What’s more, data rooms are equipped with built-in features to meet the strict requirements and regulatory standards for handling sensitive EDD information.

Enhanced due diligence for businesses in Singapore

With its strategic location, Singapore maintains high regulatory standards to avoid financial crimes. Thus, enhanced due diligence for businesses operating in or with Singapore is of great importance.

The Monetary Authority of Singapore (MAS) and other regulatory bodies enforce AML/CTF frameworks, making EDD vital for business operations.

Hence, failing to comply with these requirements can result in:

• Significant fines
• Reputational damage
• Imprisonment (in some cases)

Virtual data rooms ensure secure file sharing for businesses in Singapore, protecting the confidentiality of the data and improving collaboration with partners.

Sector-specific enhanced due diligence guidance in Singapore

Final thoughts

Enhanced Due Diligence is now more of an indispensable piece of modern business strategy rather than just a regulatory formality. Using the EDD process and adopting digital tools like VDRs helps businesses streamline their operations and mitigate financial crime risks. Moreover, investing in EDD not only ensures compliance with regulatory authorities but also protects the reputation of the organization and increases trust with clients and stakeholders.

FAQs