High-risk customers are those people who are involved in certain professions or utilize banking services and products where the possibilities of money laundering are too high. Financial institutions organize enhanced due diligence and also ongoing monitoring for high-risk customers. Moreover, a risk-based approach to fight money laundering needs the banks and financial institutions to identify the high-risk customers, especially those using Canada high risk merchant account.
Classification of High-Risk Customers
- Customers belonging to high-risk business sectors
- Unusual activity of the account
- Customers who have intransparent & complex beneficial ownership structures
- Customers with doubtful reputations as per public reports available
- Non-resident customers
- Accounts of non-interacting customers
- Accounts of cash incentive businesses like jewelry, bullion dealers, real estate developers, etc.
How Should You Identify Customers If They Are At High-Risk?
Know Your Customer (KYC) is the method that companies carry out to verify the identity of their customers in compliance with current regulations & laws. It also helps financial institutions in identifying high-risk customers and protecting their business.
With KYC Risk Rating, businesses can calculate the amount of money laundering risk that customers can bring to the company. This practice ensures that organizations do not deal with people involved in financial crimes like terrorist financing or money laundering.
Types of KYC Risk Rating
Low risk (Standard Due Diligence)
Companies can apply Standard Due Diligence (SDD) to the customers who are termed low-risk. Those customers can bring potential risk, but it is less likely that such customers can harm the company. Companies can expect a remarkable number of their customers to be identified as low-risk customers.
Medium risk (Customer Due Diligence)
Companies can apply Customer Due Diligence (CDD) to the customers identified as medium risk. It is a crucial portion of Anti-Money Laundering Compliance. Companies must use CDD before setting up business relations because it eradicates potential risks. Performing CDD checks after a suspicious transaction is also an essential step.
High risk (Enhanced Due Diligence)
Businesses can identify high-risk customers and take mandatory steps to set up business relations using a risk-based approach and Enhanced due Diligence (EDD). Organizations can only carry on the business with high-risk customers when a senior manager approves.
Know More About Enhanced Due Diligence
For any financial institute or bank, it is necessary to know the customer to obey Anti-Money Laundering Laws and prevent themselves from frauds and bad actors. So, Know Your Customer (KYC) is the first step before opening an account in a bank or financial organization. Enhanced Due Diligence can help those institutes reduce risks & carry on compliance standards while onboarding high-risk customers.
Risk management procedures can differ depending upon a customer’s risk profile. It begins by taking steps to ensure the financial institutions know with whom they are dealing. The Customer Identification Program (CIP) is the first step to identifying a business or customer. Collecting identifying details and validating those details is the starting point toward CDD compliance and reducing risk.
After that, a financial institution needs to determine the expected activity for that soon-to-be account holder. These determinations can be based on the customer classification system or the type of account.
Characteristics that make EDD different from regular KYC policies
Enhanced due diligence is designed to deal with high net-worth or high-risk customers and large transactions. These transactions and customers tend to cause high risks to the financial sector. So, they are heavily regulated and monitored to ensure that everything is under control.
- Detailed documentation: The documentation in the EDD process must be done in detail & regulators must have urgent access to EDD reports. It requires more scrutiny when it comes to capturing the data and validating the reliability of the information sources.
- Special attention to PEPs: Politically exposed persons should be given special attention. They are marked as higher risk due to their position that can be abused for money laundering.
- Reasonable assurance: When calculating KYC risk rating, EDD requirements demand reasonable assurance.
What is Ongoing Monitoring?
High-risk customers may cause harm to the organization in multiple ways. Therefore, companies should identify the level of risk of the customers at the time of customer onboarding. They should also check the risk level regularly to comply with AML regulations.
Performing customer screening is a necessary part of the AML Compliance Program. Companies need to have up-to-date information when they are checking their customers. With AML screening, companies can ensure that potential or existing customers are not present in any PEPs, sanctions lists, or adverse media data.
The Bottom Line
The identification of high-risk customers & the EDD requirements are expanding day by day. The technologies to handle them are also getting more capable. Numerous solutions are available to deal with the risks, maintain compliance, & improve your business. We hope that this article has helped you to know the high-risk customers in detail & thus you can serve your business and clients more precisely.