Enhanced Due Diligence (EDD) for Customers | CAMS Exam Preparation

When is Enhanced Due Diligence (EDD) Required for Customers?

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Question

Which situation would require enhanced due diligence (EDD) be performed on a customer?

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A. B. C. D.

C

Out of the given options, the situation that would require enhanced due diligence (EDD) to be performed on a customer is Option D - "Company ownership is held in bearer share form."

Bearer shares refer to a type of security that is not registered in any way with a particular owner's name. Instead, the physical possession of the share certificate represents ownership. Bearer shares offer a high degree of anonymity and confidentiality to the shareholder, which can make them attractive to individuals or entities seeking to conceal their ownership or engage in illicit activities, such as money laundering or terrorist financing.

Enhanced Due Diligence (EDD) is a process that involves obtaining additional information beyond the standard Customer Due Diligence (CDD) measures, to better understand the nature of the customer's activities, the source of their wealth, and the potential risks associated with the relationship. EDD is usually required when dealing with high-risk customers or in situations where there are higher risks of money laundering, terrorism financing, or other criminal activities.

In the given options, the other situations mentioned do not necessarily indicate higher risks of money laundering or terrorist financing.

Option A - A customer closing their store location and opening a new store location across town may not necessarily indicate a higher risk of money laundering, unless there are other factors that raise suspicion.

Option B - The low-risk rating for a customer that has not changed since the relationship was established 5 years ago does not necessarily indicate a higher risk of money laundering or terrorist financing. However, it is recommended that financial institutions periodically review their risk ratings to ensure that they remain accurate.

Option C - A prospective customer starting and incorporating a new business does not necessarily indicate a higher risk of money laundering or terrorist financing. However, it is important to perform proper CDD measures to assess the nature of the customer's activities and the source of their wealth.

In summary, EDD is required when dealing with higher-risk customers or situations, and the situation that would require EDD to be performed on a customer out of the given options is Option D - "Company ownership is held in bearer share form."