Who are High-Risk Customers?

Who are High-Risk Customers?

High-risk customers are typically those who present a higher risk of potential involvement in money laundering or terrorist financing. Financial institutions use risk assessment methodologies to assign different weights to their clients and categorize them according to these overall risk weightings. It’s important for institutions to conduct ongoing risk management, including periodic reviews and monitoring of transactions, to ensure that they are effectively mitigating any potential risks associated with high-risk customers.

Types of High-Risk Customers

Here are some examples of high-risk customers:

Politically Exposed Persons (PEPs)

These are individuals who are or have been entrusted with prominent public functions, such as government officials, senior politicians, and judicial or military officials. They may pose a higher risk due to their elevated political position and the potential exposure to corruption.

Charities and Non-Profit Organizations (NPOs)

These entities can be used as a cover for money laundering, especially if they receive a large portion of donations in cash or from anonymous donors.

Money Changers and Money Service Operators (MSOs)

These businesses are inherently high-risk because they deal with currency exchanges and remittances, which can be used to move illicit funds.

This is not an exhaustive list, there are many other customer types that may be rated high risk depending on he firms risk appetite. Other high risk customers include:

• Arms dealers and arms manufacturers
• Gaming and gambling enterprises

Other external factors can also be considered to increase a customer’s risk. These include reviewing the industry sector and geographic location that they are based or domiciled in. Also, financial institutions must consider the nature of their business activities, and the financial products and services that they have requested to use.

Sector

Certain industry sectors are considered more attractive to criminals and present a higher risk of money laundering, typically cash generative businesses where customers can be hard to identify and locate.

Geography

Jurisdictions with weak (or lacking) laws and enforcement are considered higher risk locations for customers.

Entity

Types of entities that are structured to conceal the identity of beneficial owners or the true nature of the entity’s business activities are considered higher risk.

Product

Financial products and services that are perceived to be useful to money laundering schemes are also considered higher risk.

Why Is It Important to Spot High-Risk Customers?

Detecting and monitoring high-risk customers is crucial for several reasons:

Preventing Financial Crime

It helps in preventing money laundering and terrorist financing to identify those who may potentially misuse financial systems for illicit activities. High-risk customers are deemed more likely to be involved in money laundering or terrorist financing due to their business or personal activities. Identifying them allows institutions to apply enhanced scrutiny to their transactions and activities.

Regulatory Compliance

Financial institutions are required by law to identify and monitor high-risk customers to comply with anti-money laundering (AML) regulations. Failure to comply can result in hefty fines and significant legal consequences

Protecting Reputation

Associating with money launderers can severely damage a financial institution’s reputation. This can lead to a loss of customer trust (and customers moving to alternative banks) as well as potential legal consequences.

Risk Management

Spotting high-risk customers allows institutions to manage and mitigate risks effectively by applying enhanced due diligence procedures.

Operational Integrity

Knowing the risk profile of customers helps maintain the integrity of the financial system and ensures that institutions are not used to facilitate illicit activities. It also allows all customers to operate legally within the financial system and not face prejudice or be forced into less secure financial institutions simply because of their background or country of domicile.

Financial institutions must assign a financial crime risk rating to every client to determine the quantity of risk management resources needed to mitigate financial crime risks. This is a key part of a broader strategy to deter, detect, and prevent financial crime. It’s not simply about identifying high-risk customers but also about continuously monitoring their activities and updating their risk profiles as necessary.

How to Identify Politically Exposed Persons

Identifying Politically Exposed Persons (PEPs) is a key aspect of anti-money laundering (AML) efforts. PEPs are individuals entrusted with prominent public functions and due to their position, they may be deemed higher risk for potential involvement in bribery and corruption. To identify PEPs, financial institutions typically follow these steps:

Customer Due Diligence (CDD)

During the onboarding process, employees responsible must gather information about the customer’s occupation, public positions held, and any known political affiliations to assess the risk weighting of the individual.

PEP Lists and Databases

Compliance departments must conduct customer checks against domestic and international PEP lists, which include individuals entrusted with prominent public functions.

Enhanced Due Diligence (EDD)

For customers identified as PEPs, institutions must perform enhanced scrutiny of their business relationships and transactions – this is required on an ongoing basis.

Ongoing Monitoring

Financial institutions must continuously monitor the accounts and transactions of PEPs to detect any suspicious activity that may indicate money laundering or other financial crimes.

Red Flags and Indicators of High-Risk Customers

There are a number of red flags that form part of a broader framework used to manage and mitigate the risks associated with financial crimes. It’s important to have robust systems in place for monitoring and surveillance, as well as clear escalation policies for unusual activity. Motivating front-line employees to remain vigilant and report suspicious activities can greatly enhance the effectiveness of these systems.

Screening Unusual Activity

Detection scenarios are used to generate monitoring exceptions for follow-up by risk owners and Financial Crime Compliance. However, these IT programs rely on AI logic and rules to monitor transactions, which can only achieve so much.

Suspicious Transaction Reports (STRs)

Suspicious Transaction Reports (STRs) are critical documents that financial institutions must file when they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or related to terrorist financing. STRs are essential for follow-up by risk owners and Financial Crime Compliance.

National Financial Intelligence Unit (FIU)

166 National Financial Intelligence Units belong to the Egmont Group, an international network of agencies that exchange information on money laundering.

Read about 10 Money Laundering Case Studies in the free download section.

Conclusion

The identification and management of high-risk customers is pivotal in safeguarding financial institutions from the threat of money laundering and terrorist financing. Using thorough application of risk assessment methodologies and enhanced due diligence, institutions can not only comply with regulatory demands but also uphold their reputation and operational integrity. As the financial landscape evolves, so must our vigilance and commitment to these critical practices, ensuring a secure and resilient financial system for all.