High-Risk Customers and Risk-Based Approach in AML Management

British regulatory authority raised the issue of risk-based Anti Money Laundering (AML) management. In 2000, the Financial Supervisory Authority (FSA), put forth the concept of risk-based AML in their book named A new regulator for the new Millenium. After that, the concept was highly admired and promoted by international regulators such as FATF, Wolfsberg Group and others. FATF even included this principle in their 40+ recommendations, which were updated in February 2012.

To simply define, a risk-based AML approach requires financial institutions to access the risks associated with illicit proceedings such as money laundering and terrorist financing. Financial Institutes must identify the risks associated with high-risk customers and resources that should be deployed before taking any measures to rectify these risks.

Why Risk-Based AML is necessary?

As the rules and regulations to stop money laundering and terrorist financing varies in different countries, the AML regulations keep on changing and it is hard to keep the record of all the regulatory changings on an international level. Money launderers, on the other hand, keep on finding the new outlets to launder their black money. Normally, the laundering is done from countries with more stringent regulations to the countries with comparatively less strict regulations.

For instance, a while ago when European union announced to audit and check cash deposit operations, money launderers drove their truck loaded with tons of black money to the countries having relatively low restrictions. Adding to the complexity, third party payment services assist payment remittance and cash flow, making the flow of funds complicated.

On the opposite side, the banks and financial institutions are required to pay more attention to this issue and make highly risk-based strategies in accordance with high profile customer risks.

So risk-based AML approach demands the banks to proficiently identify and seek out high-risk customers and identify the changes of black money in order to find a way to stop illicit proceedings of money, while regulation-based AML only requires to enforce regulations that are already in place.

Categorization of High-Risk Customers and Risk-Based Approach in AML Management

Customer risk refers to the risk of money laundering associated with a particular customer. The client risk is known on the perception of the customer’s profile and also the risk coupled with the merchandise or channel utilized by that specific customer.

To implement through KYC, AML and CFT measures, categorizing the risks affiliated with a customer along with their profile and monitoring of the accounts related to the customer is necessary for the banks and financial businesses. The main purpose of categorization is to avoid any unfavorable situation. The customers are categorized into three main divisions for this purpose.

Low-Risk Customers

Customers including individuals and entities whose sources of financial gain and transactions are easy to verify and their transactions comply with the known profile can be included in the low-risk customer categories where we are thiking about High-Risk Customers and Risk-Based Approach in AML Management. However, customers having a high net worth can not be included in this list. The patterns of low-risk customers are workers, whose earnings structures are well outlined, persons with an occasional financial gain, whose accounts show a low turnover and a minimum balance, and the government departments or entities owned by the government. In such cases, simple identity verification is required to authenticate customers.

Medium Risk Customers

Entities that are doubtless to cause over average risk to the bank may be enclosed within the class of medium and high-risk customers depending on the background history, location of the activity, sources of funds, country of origin, and consumer profile, etc. For instance, customers whose area of residence or place of work has a scope and history of unLAWful activities and customers whose client profile is uncertain, doubtful or unidentifiable by the bank.

High-Risk Customers

Individuals and entities whose source of income are uncertain or doubtful are included in high-risk customer lists. The companies got to perform increased due diligence for top profile customers following the risk-based AML principle. It is necessary to have stringent monitoring of the high-risk customers, especially those for whom the source of income is not identifiable. The customers that come under high profile customer risks include:

  • High Networth Individuals
  • Politically Exposed Persons
  • Non-residents
  • Trusts, Charities, NGOs and other organizations receiving donations
  • Firms with undeclared partners
  • Conclusion about idea High-Risk Customers and Risk-Based Approach in AML Management

    In the era, where global financial exchanges are common, new money laundering regulations come up daily. It is necessary to adopt a risk-based AML approach to monitor high-risk customers and eventually put an end to money laundering.

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