Assessing Customer Risk: A Comprehensive Guide
Companies today are increasingly focusing on customer risk assessment as a crucial strategy to combat financial crimes like money laundering. This process involves systematically evaluating the risks associated with each customer to identify those who pose higher risks.
The Customer Risk Assessment Process
The customer risk assessment process begins during onboarding through Customer Due Diligence (CDD) and continues with dynamic ongoing monitoring (continuous risk assessment). This process includes collecting and analyzing customer information, transaction patterns, and external data sources, then applying risk scoring or rating models that categorize customers into risk levels.
Factors Considered in Risk Assessment
Several key factors are considered in determining the risk level of a customer:
- Customer Type and Nature of Business: The category of customer (individual, corporate, politically exposed person, etc.) and the nature of their business activities.
- Geographical Location: The customer's country or region, especially if it is associated with higher money laundering or terrorist financing risks.
- Product and Service Usage: Types of products and services used by the customer, as some have inherently higher risk.
- Transaction Behavior and Account Activity: Monitoring ongoing transactions to detect suspicious or unusual patterns.
- Ownership and Control Structure: Beneficial ownership and control details to understand if the entity has complex or opaque structures that might conceal risk.
- Source of Funds and Income: Verifying the legitimacy and transparency of income and funds used in transactions.
- Delivery Channels: Channels through which products/services are delivered; non-face-to-face or online channels may increase risk due to anonymity.
- Negative Information: Results from negative media searches, blacklist/negative list filtering, and adverse news which might signal reputational or compliance risks.
CDD, SDD, and EDD
Based on the risk assessment, companies determine the type of Customer Due Diligence (CDD) to apply, such as Simplified Due Diligence (SDD) or Enhanced Due Diligence (EDD). SDD may apply to customers who pose a low degree of risk of money laundering and terrorist financing, as determined by the jurisdiction. EDD measures include obtaining additional information on the customer and updating more regularly the identification of the customer and any beneficial owner, obtaining information on the intended nature of the business relationship, obtaining information on the source of funds or source of wealth of the customer, obtaining information on the reasons for intended or performed transactions, obtaining the approval of senior management to commence or continue the business relationship, conducting enhanced monitoring of the business relationship, and requiring the first payment to be carried out through an account in the customer's name with a bank subject to similar CDD standards.
Special Cases
Certain situations may lead to a customer being assessed as having higher-than-usual risk. For instance, a person who is reluctant to provide information required for CDD without a reasonable explanation, a person whose IP address was determined to belong to a high-risk country, or a person passing verification on a UK platform, whose brother is a Member of Parliament, would all be treated as having a higher-than-usual risk level.
In the UK, SDD can be applied to public administrations, publicly owned enterprises, customers from low-risk countries, companies listed on a regulated market, firms holding a pooled account, certain life assurance and e-money products, certain pension funds, Child Trust Funds, listed companies, and identified low-risk customers in the UAE.
Conclusion
Customer risk assessment is an ongoing, data-driven process combining initial due diligence, risk scoring based on multiple contextual factors (customer characteristics, transaction types, geography, etc.), and continuous monitoring to manage and mitigate financial crime risks effectively. By implementing robust customer risk assessment strategies, companies can protect themselves and the financial system from the threats posed by financial crime.
- Utilizing technology to analyze customer information, transaction patterns, and external data sources is essential for effective customer risk assessment in business, as it helps identify higher-risk customers and combat financial crimes like money laundering.
- In the business realm, it's important to always consider the nature of a customer's business activities, the geographical location, and the products and services they use, as these factors can affect their risk assessment and potential involvement in financial crimes such as money laundering.
