Enhanced due diligence failures are not distributed evenly across regulated firms. Smaller compliance functions, particularly those in professional services, smaller banks and non-bank lenders, and certain categories of payment service provider, show a disproportionate rate of EDD-related findings when reviewed by supervisors. The FCA's 2025 multi-firm review of CDD and EDD controls confirmed this pattern, and the underlying reasons are worth examining rather than simply restating the findings.

Understanding why smaller firms consistently underperform on EDD requires looking beyond resource constraints, which are real but not the whole story, to the procedural and conceptual errors that resource pressure tends to amplify.

The absence of EDD-specific procedures

The most fundamental weakness, and the one from which most other failures derive, is the absence of EDD-specific procedures that tell staff what to do differently for a high-risk customer compared to a standard CDD process. Policies that define EDD as a regulatory requirement and describe the circumstances that trigger it, but that do not specify what enhanced measures consist of in practice, are not functional compliance tools.

Effective EDD procedures should specify, at minimum: what additional identity and ownership verification is required; what source of wealth evidence is required and how it is assessed for plausibility; what source of funds documentation is expected; what senior management approval process applies before the relationship is established or continued; and how findings are documented in the compliance file. Each of these elements requires clear operational guidance, not a general statement that more scrutiny will be applied.

Source of wealth: the assessment problem

The most consistently weak element in EDD practice across smaller firms is the assessment of source of wealth explanations. Obtaining a source of wealth explanation from a customer, or retrieving a self-certification, is not the same as assessing whether that explanation is plausible and adequately evidenced. The assessment requires the compliance team to consider whether the explanation is internally consistent, whether the level of wealth claimed is credible given what is known about the customer's occupation and background, what documentation has been provided to corroborate the explanation, and what additional evidence should be requested where the corroboration is insufficient.

Smaller firms tend to fail at this point not because they do not obtain source of wealth information, but because they do not build a systematic analytical framework around assessing it. The result is that files contain self-certifications without assessment, or assessments that are formulaic rather than substantive, and that would not withstand regulatory scrutiny because they do not demonstrate that genuine professional judgement was applied.

The senior management approval gap

The FCA's 2025 review found that a significant number of firms lacked documented examples of scenarios requiring senior management approval before EDD onboarding proceeded or continued. This is not simply a governance formality: senior management approval for EDD relationships serves several functions, including ensuring that the commercial relationship has been appropriately scrutinised at a level above the compliance function, creating a documented record that the decision to proceed was taken at an appropriate level, and providing a mechanism for escalation where compliance teams have concerns that are not being addressed operationally.

Firms that have approval thresholds in their policies but cannot produce documented examples of those thresholds having been applied in practice have a gap between policy and operation that regulators will identify.

Resource-efficient approaches

The practical constraint for smaller compliance functions is that EDD processes must be proportionate to the size of the team delivering them. Several approaches allow smaller firms to maintain substantive EDD processes without disproportionate resource cost. Structured EDD templates that guide analysts through each required element of the assessment, and that incorporate the analytical judgements that need to be made, reduce the risk of inconsistent practice and improve the quality of file documentation. Case-based training using worked examples of source of wealth assessments, including examples of plausible explanations, implausible explanations, and explanations that require further evidence, builds the analytical capability that EDD requires. Regular supervisory reviews of a sample of EDD files by the MLRO, with documented feedback to the case handler, creates both a quality assurance mechanism and an evidence base for the adequacy of the EDD programme.

None of these require additional headcount. They require the time, discipline and seniority to embed them consistently, and the commitment from compliance leadership to treat EDD as a genuine analytical exercise rather than a documentation exercise.