Knowing the benefits and risk level potential clients bring with them is essential for financial institutions to stay compliant and mitigate the chances of money laundering and financial fraud. That is why businesses, particularly financial institutions, are obliged to implement comprehensive customer due diligence and know your customer process while onboarding new clients, business partners, or vendors.
Collecting customers’ information, their transaction history, source of income, checking the relationship with targeted people or politically exposed persons, and their location to assess the level of risk each client may pose in money laundering and other financial fraud involved in the customer risk scoring process. By implementing the proper customer risk scoring, Firms can combat money laundering and other financial fraud, protect their reputational damage, and make sure that the organization is comprehensively complying with the AML rules and Regulations. This piece of writing will highlight the customer risk level, what factors are involved in customer risk rating, and how AML Watcher can help you in implementing automatic customer risk assessment software to stay compliant with AML regulations.
Do all customers possess the same level of risk?
The answer to this question is no because not all customers possess the same level of risk. The risk level is categorized into three different risks based on the customer transaction history and involvement in any criminal activities and relationship with any such entity. Let’s discuss them one by one.
- Low Risk Individuals
People who have strong bank balances and transaction histories, have never been involved in any criminal activities nor have relationships with targeted or politically exposed persons included in the low-risk category. There is no chance of any threat from such entities that could damage the organization’s reputation.
- Medium Risk customers
The individuals who have a good credit history but have financial issues in the past. They often try to find loopholes to avoid the regulation, but not every time. This kind of individual can pose a serious threat that can lead to money laundering or any other financial fraud.
- Sanctioned/High-Risk Individuals
the individual sanctioned by national or international regulatory bodies for their involvement in the criminal activities. They will often have a very poor credit history, not comply with the regulations, and pose serious threats of criminal activities that can damage business reputation.
Top 5 customer risk rating factors
- customer identity
Among all the important factors that an organization must look for in Custom risk scoring, the most important one is verifying the customer’s identity. The process includes collecting the first, last, and nickname, location of their residence, business address, source of income, birth date, and place. The purpose of collecting such information is to verify that the customer is the one he claims he is.
- Locational Risk
Any customer residing in any of the areas subjected by the Regulatory bodies as the higher risk location or the state with weak or no regulatory framework must be considered as a high-risk entity. All banks and other financial institutions avoid making business relations with people who belong to such jurisdictions. Therefore, customer risk scoring must consider locational scoring as well.
- Customer Businesses Type
Businesses like Gambling and gaming, Money Exchangers, Crypto, and those where money is intensively involved are more prone to be involved in money laundering and terrorist financing crimes. Therefore, customers who do such sort of business must scrutinized under comprehensive CDD and KYC procedures for better risk scoring and to mitigate the chances of financial crimes.
- Customer’s Transaction Behavior and Activity
Knowing the transaction behavior and activity of every customer is essential for financial institutions. What does transaction behavior mean? Checking the unusual transaction volume, where the transaction is being made, and unexpected movement of money to the jurisdiction with a weaker regulatory framework is part of checking customer behavior and activities.
By monitoring and assessing transaction behavior, organizations can identify potential money laundering or other illicit activities early, allowing them to take swift action.
- Source of Income
In customer risk scoring the source of income is a critical factor that helps financial institutions assess the legitimacy of funds and detect potential money laundering activities. By verifying where a customer’s money comes from—such as employment, business activities, or investments—institutions can identify discrepancies between declared income and actual financial behavior.
Understanding and documenting the source of income not only ensures compliance with anti-money laundering regulations but also enhances the institution’s ability to prevent financial crimes and maintain the integrity of its operations.
Strengthen Your AML Compliance with AML Watcher’s Effective Customer Risk Scoring
Understanding and combating the higher risk of money laundering and other financial crimes is very much essential for financial institutions. One of the great way to combat it so to implement comprehensive customer risk scoring, this way organizations can better assess the risk associated with customers.
