During the Customer Onboarding Process, Customer Risk Assessment is conducted to accurately analyze the potential risks posed by new customers. This process involves creating risk cards based on customer information and assigning risk levels to take necessary actions accordingly.
Customer risk refers to the possibility of customers in financial institutions engaging in undetected money laundering or other financial crimes. If suspicious activities of customers come to light, organizations may face regulatory penalties and suffer financial and reputational setbacks.
It is impossible to completely eliminate all risks associated with clients using financial institutions for illicit activities. Therefore, institutions must manage risks according to their risk appetite.
There are four categories of risk that customers can fall under:
- Low risk: These are customers who can be easily identified.
- Medium risk: These are customers who pose a greater risk than the average customer.
- High risk: These are customers whose financial activities are closely monitored due to Customer Due Diligence.
- Prohibited: These are customers who are forbidden from engaging in financial activities due to their involvement in financial crimes.
Customer Risk Score
Financial institutions are required by FinCEN's Customer Due Diligence (CDD) Rule to assess their customers' money laundering and terrorist financing risks by creating a customer "risk profile." Typically, this is done through a customer risk rating or score, which enables financial institutions to monitor high-risk customers more closely.
Although not mandated by law, it is imperative for financial institutions to monitor client transactions and identify suspicious activities. The Bank Secrecy Act (BSA) and other global regulations require individual testing to ensure compliance, making risk assessment procedures crucial for high-risk organizations to prevent money laundering abuses.
AML Risk Assessments play a critical role in preventing financial crimes and adhering to regulatory guidelines. Customer Risk Assessments should encompass specific risk categories unique to the financial services institution, such as customers, products, services, and location. After identifying key risk areas, organizations must establish processes to assess risk in each category. This approach shows regulators that the company is taking sincere efforts to combat financial crimes.
How do Customer Risk Assessments work?
By evaluating various factors such as customer activities, geographical locations, offered products and services, transaction methods, and origin of clients' funds, businesses can identify areas of vulnerability and determine how to mitigate risks. The structure of the risk assessment will depend on the size and organization of the business, as well as the types of products and services they offer.
Evaluating these factors helps identify financial crimes such as terrorist financing, bribery, and corruption. It also helps businesses avoid government sanctions and pressure from other regulatory agencies by identifying risks and assessing appropriate risks.
During a risk assessment, businesses can determine a risk rating and range for their customers by deciding whether there is a low, medium, or high risk of money laundering. Adopting a risk-based approach can improve business relationships with legitimate customers and reduce the overall risk of violating AML regulations. Thus, conducting Customer Risk Assessments is a critical step for businesses to prevent financial crimes and ensure compliance with regulations.
Customer Risk Factors
Product and Service
An organization's level of money laundering risk is influenced by the nature of its products and services. For instance, a bank that facilitates frequent money transfers carries a higher risk. Although banks can take defensive measures, such as preventing money mules, they remain vulnerable due to the high volume of money involved. Therefore, it is crucial to conduct a customer risk assessment that aligns with the institution's risk appetite.
Customers
Certain customers pose a higher risk than others, such as Political Exposed Persons (PEPs). PEPs are considered high-risk clients due to their increased likelihood of acquiring property through illegal means, including bribery and money laundering. Consequently, PEPs may be susceptible to blackmail or attempting to evade taxes. Institutions must remain vigilant of these potential risks and conduct thorough risk assessments.
It is important to thoroughly review the history of customers who have engaged in suspicious transactions or have unclear backgrounds and no clear way to generate income. This is why the Know Your Customer control process is mandatory.
Industry
Certain industries, such as casinos, money service businesses, and foreign financial institutions, are more vulnerable to money laundering and may be considered high-risk for AML compliance.
Geolocation
It is crucial to consider the geographical location of customers, especially those with significant identities. If clients conduct business in areas with inadequate anti-money laundering regulations, it is essential to scrutinize their transactions. Although some foreign investments aim to legally minimize taxes, certain countries are notorious for financial crimes, particularly drug trafficking. Hence, some regions, such as the Democratic Republic of Congo, Myanmar, Mozambique, Cayman Islands, and Madagascar, are considered high-risk.
Residency
Customers who are non-residents or have accounts in foreign jurisdictions may be considered high-risk for AML compliance, as they may be more difficult to monitor and verify.
It is crucial for your organization to keep an eye on customers who frequently engage in financial activities related to high-risk areas. Failure to do so can cause significant problems. Make it a priority to regularly review this directory and adjust your AML risk assessment methodology as needed.
How to Create Effective Customer Risk Assessment Systems
Financial institutions must adopt customer risk assessment to identify and manage the risks associated with each customer. By profiling customers based on their characteristics and behaviors, institutions can assign a risk level to each customer and implement appropriate AML and fraud prevention measures.
To create an effective customer risk assessment system, financial institutions can use the Sanction Scanner Customer Risk Assessment product. This tool allows institutions to create a risk-based scorecard to assess customers based on their profile data, such as occupation, age, income, country, and currency.
By analyzing the risk level of each customer, financial institutions can identify high-risk customers who require additional scrutiny and implement enhanced due diligence measures. They can also assign low-risk customers to a simplified due diligence process, reducing compliance costs and improving customer experience.
Additionally, the Sanction Scanner Customer Risk Assessment product enables institutions to monitor customer transactions and update their risk scores based on any changes in their behavior or profile data. This ensures that institutions are aware of any suspicious activities and can take appropriate action to prevent financial crimes.
Request a Demo to see how you can perform an effective Customer Risk Assessment in your company with Sanction Scanner.
