Beyond KYC: Closing Compliance Gaps with Enhanced Due Diligence

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The rise in financial crimes and evolving regulations has heightened the need for robust KYC and due diligence. Financial institutions face growing compliance challenges, with the FCA (Financial Conduct Authority) issuing over £2 million in fines in the UK this year alone. Meanwhile, cryptocurrencies and decentralised finance add to money laundering risks and regulatory pressures.

Regulatory frameworks like the EU's MiCA and the upcoming Beneficial Ownership Information database demand greater transparency. The urgency is clear, with identity fraud costing U.S. consumers a staggering $56 billion in 2021 alone, and the eKYC market projected to reach $3.56 billion by 2033. KYC has evolved from manual processes to AI-driven verification and risk-based assessments, with EDD and perpetual KYC becoming standard. Stricter enforcement, seen in the EU’s AML directives, reflects this shift.

Despite this, financial institutions struggle with fragmented data, inefficient verification, and adapting to evolving regulations.
Thus, this article explores:

How financial institutions conduct KYC and Due Diligence
Compliance Gaps and Challenges in KYC
How Cedar Rose’s expertise helps bridge these gaps

How Financial Institutions Conduct KYC and Due Diligence

Financial institutions conduct Know Your Customer (KYC) and due diligence through a multi-step process designed to prevent financial crime.

This “KYC framework" or process is generally structured around 3 core components: Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD), along with ongoing monitoring and reporting.

The key steps include:

Customer Identification and Verification (CIP + Digital Authentication)
Institutions gather customer details (name, address, DOB, ID) and screen against sanctions, watchlists, and PEPs. Biometric and e-KYC solutions are also used to enhance authentication.
Risk Assessment and Due Diligence (CDD) including Beneficial Owner Identification
Customer risk is assessed based on occupation, financial activity, transaction patterns and business relationships. This includes identifying and verifying beneficial owners of legal entities. Verification is conducted through sanctions lists, public records, media reports, and third-party data.
Enhanced Due Diligence (EDD) including Source of Wealth for Beneficial Owners
This is applied to high-risk customers, via thorough background checks, validation of sources of wealth (including beneficial owners), and heightened monitoring of transactions and activities.
Continuous Monitoring and Fraud Detection
This includes transaction monitoring for unusual patterns, sanctions screening against watchlists, and periodic reviews of customer data, especially for high-risk individuals. AI-driven compliance tracking systems help in automatically adapting to these new requirements.

Reporting and Regulatory Compliance
When a customer’s activity raises red flags, Suspicious Activity Reports (SARs) are filed with regulators (e.g., FinCEN, FCA). Institutions must also comply with AML laws, KYC regulations, and evolving policies, often using AI-driven compliance systems to stay updated.

This process is risk-based, giving thorough attention to high-risk clients while making the verification simpler and more efficient for those at lower risk.

Compliance Gaps and Challenges in KYC

Despite progress in KYC and due diligence, technological, regulatory, and operational issues create significant compliance gaps for financial institutions.

The key challenges and gaps affecting compliance efforts are:

Identity Verification and Beneficial Ownership Challenges
Ensuring accurate customer identity verification online has become increasingly challenging due to the rise of fake IDs and identity fraud. Remote onboarding requires robust liveness detection, while unreliable data further complicates authentication particularly in regions with weak infrastructure.

Identifying ultimate beneficial owners (UBOs) is also a major compliance issue since complex corporate structures, layered ownership, jurisdictional differences, nominee arrangements, and poor registries (or lack of centralised registries) obscure true ownership.
Inefficiencies in Risk Detection and Ongoing Monitoring
Outdated risk assessments and manual processes hinder modern compliance. Static assessments miss behavioural changes, requiring dynamic monitoring. High false positives in transaction monitoring cause alert fatigue, increasing missed suspicious activity. Outdated systems struggle with evolving sanctions and regulations.

Many rely on manual KYC, leading to errors and delays. Furthermore, the high cost of compliance and fragmented data, especially in the MENA, complicate efforts, increasing risks for financial institutions.
Cross-Border Compliance Complexities and Regulatory Challenges
Cross-border due diligence is significantly complicated by the heterogeneity of AML policies, sanctions enforcement regimes, and data privacy regulations, such as GDPR. These inconsistencies contribute to increased compliance costs and elevate the regulatory risk profile for organisations operating across international borders.

This is further compounded by evolving standards like the EU's 2025 AML Package and FATF's Beneficial Ownership Rule. Divergent requirements, for example, between GDPR and U.S. state laws, create operational hurdles. Non-compliance carries significant penalties, and new mandates are emerging.
High Costs and Challenges in Verifying Source of Wealth (SOW)
KYC compliance demands considerable investment in technology, data acquisition, and personnel. Automated systems often generate high false positives, requiring manual intervention and increasing operational costs. Moreover, lengthy onboarding processes also leads to inefficiencies, poor customer experience, and lower conversion rates.

One of the biggest challenges too is verifying the source of wealth (SOW).
It remains complex due to complex financial structures, limited data access, and documentation gaps. High-net-worth individuals often use multi-layered financial arrangements, making fund origins difficult to trace. Jurisdictional restrictions further limit access to necessary records, while incomplete documentation complicates due diligence. The risk of forged documents, especially in high-risk regions, requires enhanced scrutiny and advanced verification techniques to ensure compliance.

How Cedar Rose’s Expertise Helps Bridge these Gaps

Cedar Rose bridges KYC and due diligence gaps by providing comprehensive risk intelligence and enhanced due diligence (EDD) solutions. Through UBO tracing, business network analysis, and OSINT-driven insights, we uncover hidden ownership structures, offshore entities, and nominee arrangements, ensuring transparency in high-risk jurisdictions. Our political connections screening and sanctions monitoring further help identify document fraud, source-of-wealth inconsistencies, and reputational risks.

We also conduct Human Intelligence (HUMINT) investigations and executive risk analysis to provide non-public insights into leadership integrity and governance risks. Additionally, our adverse media monitoring and continuous regulatory tracking enable proactive risk mitigation. By integrating real-time compliance screening and robust AML frameworks, Cedar Rose helps businesses detect high-risk entities, prevent financial crime, and stay ahead of evolving regulations.

Beyond KYC: Closing Compliance Gaps with Enhanced Due Diligence

How Financial Institutions Conduct KYC and Due Diligence

Compliance Gaps and Challenges in KYC

How Cedar Rose’s Expertise Helps Bridge these Gaps

Sources

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