Customer Risk Assessment is a set of measures taken during the Customer Onboarding Process. Customer Risk Assessment is a process by which a new customer's potential risks are analyzed more accurately. Organizations can create risk cards according to risk levels according to information about customers and take the necessary steps according to these scores.
Customer risk is the risk that customers in financial institutions will commit undetected money laundering or other financial crimes. If potential suspicious activities of customers are exposed, the organization may face regulatory penalties and financial and reputational problems.
There is always a risk for any client to use institutions for illegal activities. Since it is impossible to eliminate all risks, risk should be managed according to the institutions' risk appetite.
Customer Risk Levels
There are four levels of risk, and they are:
- Low: Easily identifiable customers.
- Medium: Customers who pose a higher risk than the average customer.
- High: Customers whose financial activities are monitored by Customer Due Diligence.
- Prohibited: Customers who are banned from financial activities due to their involvement in financial crimes.
Customer Risk Score
FinCEN's Customer Due Diligence (CDD) Rule requires financial institutions to establish an understanding of their customers' money laundering and terrorist financing risks through a customer "risk profile." For most financial institutions, this takes the form of a customer risk rating or rating. The risk score allows targeted tracking of customers with higher potential risks.
Customer Risk Assessments
While risk assessment procedures are not required by law, appropriate monitoring of client transactions and all suspicious activity is required. In addition, the Bank Secrecy Act (BSA) in the US and other regulations worldwide require individual testing to ensure compliance, so performing a risk assessment procedure is a necessary step for financial institutions at high risk for money laundering abuses.
AML Risk Assessments are essential for preventing financial crimes and following regulatory guidelines. Customer Risk Assessments should include identifying risk categories specific to the financial services organization, such as customers, products, services, and location. Once organizations have identified key risk areas, they should put processes to assess risk in each category. This proves to regulators that the company is making a good faith effort to prevent financial crimes.
How do Customer Risk Assessments work?
Risk assessments identify areas of vulnerability in your organization, allowing you to determine how to fix problems in your AML efforts. The risk assessment structure will depend on the size and organization of the businesses and the types of products and services they offer. Here are the factors to consider in your risk assessment:
- Types of customers
- Geographical locations of customers and organizations
- Customer activities
- Offered products and/or services
- How the company conducts transactions
- Origins of clients' funds
Evaluating these factors will be very helpful in identifying financial crimes such as terrorist financing, bribery, and corruption. In addition, government sanctions and pressure from other regulatory agencies can only be avoided by identifying risks and assessing appropriate risks.
When conducting a risk assessment, you will be able to determine a risk rating and range for your customers by deciding whether there is a low, medium, or high risk of money laundering. Adopting this risk-based approach will help you improve your business relationships with legitimate customers and reduce your overall risk of violating AML regulations.
Customer Risk Factors
In many organizations, the main indicators of money laundering risk are products and services, customer profiles, and geographic location.
Product and Service
The nature of products and services helps determine an organization's level of money laundering risk. For example, a bank with continuous money transfers has a much higher risk. Banks can be defensive, especially in terms of money mules. However, it is also vulnerable to money laundering because so much money changes hands in banks. For this reason, a customer risk assessment process should be carried out according to the institution's risk appetite.
Some types of customers are riskier than others. For example, Political Exposed Persons (PEPs). Politically Exposed Persons (PEPs) are high-risk clients who've greater possibilities than normal residents to collect the property in an unlawful way which includes taking bribes and money laundering. Therefore, PEPs are liable to blackmail or can be looking to keep away from authorities' taxes. Institutions have to be alert to those dangers and make important risk assessments.
Customers who have a history of questionable transactions other than PEPs, blurred backgrounds,s and no clear way to monetize should be considered carefully. That's why Know Your Customer is a mandatory control process.
The more important the customer's identity is, the more important it is in which geography it is located. If your customers do business in some geographic regions, especially where money laundering laws are lacking, it is necessary to look at their transactions. While some overseas investments are only made to legally pay lower taxes, many countries are characterized as high financial crime areas, particularly high drug trafficking areas. Some of the countries seen as risky are as follows: Democratic Republic of Congo, Myanmar, Mozambique, Cayman Islands, and Madagascar.
If customers have high levels of financial activity associated with these areas, they can be a serious problem for your organization. Your organization should regularly review this directory and update your AML risk assessment methodology accordingly.
How to Create Effective Customer Risk Assessment Systems
Make your customer risk assessment process easy and effective with the Sanction Scanner Customer Risk Assessment product. Risk-based compliance management is used to visualize strategy and risk management data and inform decision-making. With more control compliance, you can strengthen your business, learn more about your risky customers, and use these risk assessment criteria in your rules with a risk-based scorecard review.
With the dynamic rule writing feature, you can create the most appropriate rules and scenarios according to your risk appetite without writing code. You can fine-tune your regulations and analyze customer risk based on your organization's risk appetite.
You can assign risk points to your customers with the rules you write according to your risk appetite and make an end-to-end risk analysis for your customers through the risk scores. You can assign points to your customers based on occupation, age, income, country, and currency and define low, medium, high, and critical alarms based on these scores.
Finally, you can easily decide on the action steps according to the alarms you receive during the transactions with your customers. Based on the risk analysis, you can make safe and fast decisions about your customers' activities and reduce your control workload.
Request a Demo to see how you can perform an effective Customer Risk Assessment in your company with Sanction Scanner.