What is enhanced due diligence?

Running a business means making decisions based on trust, whether you’re lending money, applying for finance, or partnering with another company. Every financial relationship carries some level of risk, and that’s why due diligence exists.

But in some cases, ordinary checks aren’t enough. This is where enhanced due diligence plays a role. It is a deeper, more detailed process designed to protect your business from fraud, financial crime, and poor lending decisions.

This guide explains when you, as a business owner, must carry out enhanced due diligence, and when your own business might be subject to these checks.

What does enhanced due diligence mean?

Enhanced due diligence is part of the UK’s anti-money laundering (AML) and Know Your Customer (KYC) framework. It goes beyond basic identity and credit checks and allows you to understand who you’re dealing with and where their money comes from.

While a standard check might confirm a company’s registration and directors, enhanced customer due diligence asks further questions, such as:

• Who really owns or controls the business?

• Is the source of funds legitimate?

• Could there be links to high-risk countries or politically exposed persons (PEPs)?

It’s a safeguard designed to keep your business compliant with UK law and to make sure you’re not unknowingly involved in suspicious or highrisk transactions.

When you need to carry out enhanced due diligence

Under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (also known as MLR 2017), businesses classed as “relevant persons” must perform enhanced due diligence when there’s a higher risk of money laundering or terrorist financing.

You’re required to apply enhanced due diligence in situations such as:

• When your customer or business partner is based in a high-risk third country, as listed by the Financial Action Task Force (FATF). 

• When you’re dealing with a politically exposed person, or someone closely associated with one.

• When transactions are unusually large or complex, or when there’s no clear business purpose.

• When you suspect false information or fraudulent documentation.

Even if you’re not legally required to carry out enhanced due diligence, it’s wise to do so whenever something about a client, partner, or transaction feels uncertain. A risk-based approach is central to compliance. As a general rule, the greater the risk, the deeper the checks should go.

What does an effective enhanced due diligence process look like?

For most businesses, enhanced due diligence involves going a few steps further than standard checks. You’ll need to carry out the following:

• Independent identity verification
  This involved using trusted sources such as Companies House or regulated credit bureaus rather than relying solely on documents supplied by the customer.

• Beneficial ownership checks
  You’ll need to identify who ultimately controls or benefits from the business.

• Source of funds and wealth assessment
  Understand where money involved in a transaction originates. This is essential if you’re offering or receiving large loans or investments.

• Company credit checks
  Reviewing a company’s credit report, payment behaviour, and any County Court Judgments (CCJs) helps confirm both its legitimacy and financial stability. You can easily check a company’s credit report and see any red flags such as CCJs and other legal notices with a Capitalise account. You’ll be able to keep track of your own credit score and the credit profiles of the companies you work with, all in one place.

• Screening for sanctions and high-risk countries
  Always check whether clients or partners appear on sanctions lists or are connected to jurisdictions under FATF monitoring.

• Senior management approval
  Before entering into or continuing a high-risk relationship, UK law expects that senior staff sign off on it.

• Keep detailed records
  The MLR 2017 requires you to keep enhanced due diligence documentation for at least five years after the business relationship ends.

Together, these steps form a complete picture. This will help to protect your business, not just from legal penalties, but also from financial loss.

Why enhanced due diligence matters for lenders and credit offering businesses

If you lend money, offer credit, or help clients access finance, enhanced due diligence should sit alongside your business credit checks as part of your normal decision making.

It’s important to carry out both, as credit data shows whether a company manages its finances well, while enhanced due diligence helps you determine whether you should trust them in the first place. For example:

• A business might have a healthy credit score but receive funds from questionable sources. This is something only enhanced due diligence would reveal.

• An applicant for a loan might use a complex ownership structure that hides the real decision makers. Verifying beneficial ownership helps prevent fraud and meet anti money laundering obligations.

While business credit scores remain a key factor in business loan approval, lenders also need confirmation that the companies they are dealing with are compliant. Enhanced due diligence fills that gap by providing further information. 

When might your own business be subject to enhanced due diligence?

Enhanced due diligence doesn’t only apply to the checks you carry out, other organisations might perform them on you, too. You could expect to be subject to enhanced due diligence checks in the following scenarios:

During a loan or credit application

When you apply for a business loan, lenders are legally required to perform customer due diligence, and in some cases, enhanced due diligence. If your business is in a higher risk sector, operates internationally, or has a complex ownership structure, the lender may need additional verification. That might include:

• Proof of company ownership and control

• Evidence of where investment funds come from

• Identification of directors and key shareholders

• Copies of recent bank statements or financial accounts

These checks can sometimes feel intrusive, but they’re there to protect both parties. By keeping your financial records up to date, you can make the process quicker and easier. 

When partnering with or supplying to larger firms

If you’re working with major clients, particularly those in regulated sectors such as finance, legal, or real estate, they may conduct enhanced due diligence on you before signing a contract. This helps them meet their own regulatory duties under the Money Laundering Regulations and the FCA’s financial crime guidance. You could expect to be asked for documents like:

• Proof of registration with Companies House

• Confirmation of beneficial ownership

• Evidence of AML policies or risk assessments

Having this information ready not only speeds up onboarding but also builds confidence in your professionalism and compliance culture.

When seeking investment or operating across borders

Investors, particularly venture capital and private equity firms, are under increasing pressure to verify the businesses they fund. If your company seeks investment, especially from overseas, you can expect enhanced due diligence checks around your ownership, finances, and funding sources. Similarly, if you trade internationally, foreign banks or partners may perform their own checks aligned with FATF standards. Being transparent and prepared helps you pass them with minimal delay.

Staying ahead of regulatory changes

AML and due diligence requirements evolve constantly. The UK government updates its high-risk country lists several times a year, and the HM Treasury’s AML supervision report highlighted that smaller firms often struggle to keep up. Ensuring your company has regular training and a clear internal policy are the best ways to stay compliant. A practical step is to maintain an enhanced due diligence checklist, a short, standardised list of the key verifications you perform. This ensures consistency, supports your record keeping obligations, and shows regulators that you’re following a structured, risk-based approach.

Enhanced due diligence is both a legal requirement and a practical safeguard. As a business owner, you might apply it to others to ensure you’re lending or trading safely, and you might also be subject to it yourself when applying for finance or forming partnerships.

By combining enhanced due diligence with regular credit score monitoring, anti money laundering checks, and good record keeping, you create a transparent business that inspires confidence in lenders, investors, and customers alike.