AML/CFT — Enhanced Due Diligence (EDD) & PEPs
Concept
Enhanced Due Diligence (EDD) is intensified CDD applied where ML/TF risk is higher than standard. The classic trigger is a Politically Exposed Person (PEP) — a natural person entrusted with prominent public functions — together with their family members and close associates. EDD also applies to complex, unusually large or unusual-pattern transactions with no apparent economic/lawful purpose, and to customers/transactions connected to higher-risk countries. EDD does not replace CDD; it layers additional measures on top.
Key rules & facts
- PEP definition — three categories:
- Foreign PEP: entrusted with prominent public functions by a foreign country (head of state, senior politician, senior government/judicial/military official, senior executive of a state-owned enterprise, important political-party official).
- Domestic PEP: the same functions entrusted domestically (in Singapore).
- International-organisation PEP: a person entrusted with a prominent function by an international organisation (e.g. director, deputy director, board member).
- Family members and close associates of a PEP are caught even though they hold no office themselves — e.g. spouse, children, parents, siblings; and business partners or those with close business/beneficial-ownership links.
- The three-step EDD drill for (higher-risk) PEPs: (1) obtain senior-management approval to establish or continue the relationship; (2) establish source of wealth AND source of funds; (3) conduct enhanced ongoing monitoring.
- Source of wealth ≠ source of funds: source of wealth = origin of the person's total net worth/economic background; source of funds = origin of the specific monies used in the relationship/transaction. Both are required for higher-risk PEPs.
- Risk treatment: foreign PEPs are treated as higher risk by default; domestic and international-organisation PEPs are risk-assessed — EDD applies where the relationship is assessed as higher risk (verify current MAS Notice treatment).
- Persistence: PEP status can persist after the person leaves office — apply a risk-based approach to how long heightened scrutiny continues (verify current MAS guidance; there is no automatic fixed cut-off).
- Other EDD triggers: higher-risk countries/jurisdictions; complex, unusually large, or unusual-pattern transactions with no apparent economic or lawful purpose (examine the background and purpose and document findings).
Key data
| PEP category | Who | Default risk treatment |
|---|---|---|
| Foreign PEP | Prominent public functions in a foreign country | Higher risk by default → full EDD |
| Domestic PEP | Prominent public functions in Singapore | Risk-assessed; EDD if higher risk |
| International-org PEP | Prominent function in an international body | Risk-assessed; EDD if higher risk |
| Family / close associate | Relatives, business partners of a PEP | Follows the PEP's status |
| Feature | Standard CDD | Enhanced Due Diligence (EDD) |
|---|---|---|
| Approval to onboard | Normal authority | Senior-management approval required |
| Source checks | Not routinely required | Source of wealth AND source of funds |
| Monitoring | Ongoing monitoring | Enhanced ongoing monitoring |
| Trigger | Default relationships | PEPs, higher-risk countries, complex/unusual transactions |
Exam angle
Highly situational — recognise a PEP (often disguised via a family member or close associate), then pick the full combination: source of wealth and source of funds and senior-management approval and enhanced monitoring. Also distinguish the three PEP categories and their default risk treatment.
⚠ The trap
Choosing only one requirement when all three apply; missing that a spouse, child, or close business associate is caught even though they hold no public office; or assuming a domestic PEP automatically gets the same default higher-risk treatment as a foreign PEP (domestic/int'l-org PEPs are risk-assessed).
Worked example
A prospective client is the adult son of a serving foreign finance minister. The son holds no office, so a candidate might apply only standard CDD. Correct answer: he is a family member of a foreign PEP, so full EDD applies — establish source of wealth and source of funds, obtain senior-management approval, and place him under enhanced ongoing monitoring.
Takeaway
PEP = the three-step drill — source it (wealth and funds), approve it (senior management), and watch it (enhanced monitoring) — and remember family/associates and the foreign-vs-domestic distinction.
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