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23 September 2022

Customer risk assessment: what you need to know.

Insights Customer risk assessment: What you need to know

A customer risk assessment is a necessity when onboarding new customers . It ensures that high-risk individuals are identified, and appropriate anti-money laundering (AML) measures are put in place.

But what elements should firms consider as part of an AML customer risk assessment? And how do they determine what to prioritize? 

What is a customer risk assessment?

In order to understand the money laundering risks each customer poses, a customer risk assessment should consider a number of factors.  These include verifying the identity of a customer , considering how to engage with them – the products and services they access, the type of transactions they carry out, and how often – and the geographical locations to which the customer is linked. 

In addition, firms should ensure they comply with national and international sanctions by screening customer and beneficial owner names against United Nations and other relevant sanctions lists.

Firms will have different levels of risk appetite regarding the customers they are willing to work with. However, it is important that a consistent customer risk assessment methodology is implemented, setting out the criteria for customer risk scoring weighting mechanisms, and the rationale behind these.

The main purpose of the assessment is to identify the risks to which a firm may be exposed, either in the course of a business relationship, or for an occasional transaction. The more complex this interaction is, the more rigorous a customer risk assessment needs to be. 

By being well informed, firms will be better placed to determine the correct level of customer due diligence (CDD). Ongoing reviews should be completed, particularly if a customer starts to act in a manner that deviates from their risk profile. The Financial Action Task Force (FATF) recommends that where firms cannot apply the appropriate level of CDD, they should not enter into the business relationship, or should terminate the business relationship.

What factors should be included in a customer due diligence risk assessment?

There are four main pillars to consider in a customer risk assessment: 

In the US, the Financial Crimes Enforcement Network’s (FinCEN) CDD Final Rule clarifies and strengthens customer due diligence requirements. It requires applicable financial institutions to establish and maintain written policies and procedures that are designed to:

• Identify and verify the identity of customers
• Identify and verify the identity of the beneficial owners of companies opening accounts
• Understand the nature and purpose of customer relationships to develop customer risk profiles
• Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

Dynamic AML customer risk assessment

Ongoing due diligence of customers is needed to help firms mitigate money laundering risk , but what is suspicious for one customer won’t be for another. 

Some general behaviors that may raise a red flag, or prompt a re-evaluation of a customer risk assessment include: 

• Changing banks a number of times in a short space of time 
• Attempts to disguise the real owner of the business
• Requests for short-cuts or unusual speed in transactions
• Involvement of a third-party funder with no connection to the business 
• A large amount of private funding from an individual running a cash-intensive business
• False or suspicious documents used
• A large amount of cash transactions inconsistent with the profile of the customer
• Business transactions involve countries with a high risk of money laundering and/or funding of terrorism
• Overly complicated ownership structures
• Inconsistent level of business activity

Firms need to more accurately flag suspicious actors and activities . To do so, they need to understand the importance of dynamic risk assessments and have the data and technology to enable this.

Misclassification of low-risk customers as high risk, and inaccurate or insubstantial KYC information gathering, can dilute the effectiveness of AML measures – and a wholly manual and complex process may not be enough to guarantee the results needed.

Firms should consider simplifying the architecture of their risk models and introducing statistical analysis to complement expert judgment. Machine learning algorithms can improve the quality of data and help continuously update customer profiles, while considering behavior and additional factors.

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Originally published 23 September 2022, updated 15 April 2024

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Copyright © 2024 IVXS UK Limited (trading as ComplyAdvantage).

Flushing out the money launderers with better customer risk-rating models

Money laundering is a serious problem for the global economy, with the sums involved variously estimated at between 2 and 5 percent of global GDP. 1 “Money-laundering and globalization,” United Nations Office on Drugs and Crime, unodc.org. Financial institutions are required by regulators to help combat money laundering and have invested billions of dollars to comply. Nevertheless, the penalties these institutions incur for compliance failure continue to rise: in 2017, fines were widely reported as having totaled $321 billion since 2008 and $42 billion in 2016 alone. 2 Gavin Finch, “World’s biggest banks fined $321 billion since financial crisis,” Bloomberg , March 2, 2017, bloomberg.com. This suggests that regulators are determined to crack down but also that criminals are becoming increasingly sophisticated.

Customer risk-rating models are one of three primary tools used by financial institutions to detect money laundering. The models deployed by most institutions today are based on an assessment of risk factors such as the customer’s occupation, salary, and the banking products used. The information is collected when an account is opened, but it is infrequently updated. These inputs, along with the weighting each is given, are used to calculate a risk-rating score. But the scores are notoriously inaccurate, not only failing to detect some high-risk customers, but often misclassifying thousands of low-risk customers as high risk. This forces institutions to review vast numbers of cases unnecessarily, which in turn drives up their costs, annoys many low-risk customers because of the extra scrutiny, and dilutes the effectiveness of anti–money laundering (AML) efforts as resources are concentrated in the wrong place.

In the past, financial institutions have hesitated to do things differently, uncertain how regulators might respond . Yet regulators around the world are now encouraging innovative approaches to combat money laundering and leading banks are responding by testing prototype versions of new processes and practices. 3 The US Treasury and banking agencies have together encouraged innovative anti–money laundering (AML) practices; see “Agencies issue a joint statement on innovative industry approaches,” US Office of the Comptroller of the Currency, December 3, 2018, occ.gov. In China, the Hong Kong Monetary Authority has backed the wider use of regulatory technology, and in the United Kingdom, the financial regulator has established a fintech sandbox to test AML innovations. Some of those leaders have adopted the approach to customer risk rating described in this article, which integrates aspects of two other important AML tools: transaction monitoring and customer screening. The approach identifies high-risk customers far more effectively than the method used by most financial institutions today, in some cases reducing the number of incorrectly labeled high-risk customers by between 25 and 50 percent. It also uses AML resources far more efficiently.

Best practice in customer risk rating

To adopt the new generation of customer risk-rating models, financial institutions are applying five best practices: they simplify the architecture of their models, improve the quality of their data, introduce statistical analysis to complement expert judgment, continuously update customer profiles while also considering customer behavior, and deploy machine learning and network science tools.

1. Simplify the model architecture

Most AML models are overly complex. The factors used to measure customer risk have evolved and multiplied in response to regulatory requirements and perceptions of customer risk but still are not comprehensive. Models often contain risk factors that fail to distinguish between high- and low-risk countries, for example. In addition, methodologies for assessing risk vary by line of business and model. Different risk factors might be used for different customer segments, and even when the same factor is used it is often in name only. Different lines of business might use different occupational risk-rating scales, for instance. All this impairs the accuracy of risk scores and raises the cost of maintaining the models. Furthermore, a web of legacy and overlapping factors can make it difficult to ensure that important rules are effectively implemented. A person exposed to political risk might slip through screening processes if different business units use different checklists, for example.

Under the new approach, leading institutions examine their AML programs holistically, first aligning all models to a consistent set of risk factors, then determining the specific inputs that are relevant for each line of business (Exhibit 1). The approach not only identifies risk more effectively but does so more efficiently, as different businesses can share the investments needed to develop tools, approaches, standards, and data pipelines.

2. Improve data quality

Poor data quality is the single biggest contributor to the poor performance of customer risk-rating models. Incorrect know-your-customer (KYC) information, missing information on company suppliers, and erroneous business descriptions impair the effectiveness of screening tools and needlessly raise the workload of investigation teams. In many institutions, over half the cases reviewed have been labeled high risk simply due to poor data quality.

The problem can be a hard one to solve as the source of poor data is often unclear. Any one of the systems that data passes through, including the process for collecting data, could account for identifying occupations incorrectly, for example. However, machine-learning algorithms  can search exhaustively through subsegments of the data to identify where quality issues are concentrated, helping investigators identify and resolve them. Sometimes, natural-language processing (NLP) can help. One bank discovered that a great many cases were flagged as high risk and had to be reviewed because customers described themselves as a doctor or MD, when the system only recognized “physician” as an occupation. NLP algorithms were used to conduct semantic analysis and quickly fix the problem, helping to reduce the enhanced due-diligence backlog by more than 10 percent. In the longer term, however, better-quality data is the solution.

3. Complement expert judgment with statistical analysis

Financial institutions have traditionally relied on experts, as well as regulatory guidance, to identify the inputs used in risk-rating-score models and decide how to weight them. But different inputs from different experts contribute to unnecessary complexity and many bespoke rules. Moreover, because risk scores depend in large measure on the experts’ professional experience, checking their relevance or accuracy can be difficult. Statistically calibrated models tend to be simpler. And, importantly, they are more accurate, generating significantly fewer false-positive high-risk cases.

Building a statistically calibrated model might seem a difficult task given the limited amount of data available concerning actual money-laundering cases. In the United States, suspicious cases are passed to government authorities that will not confirm whether the customer has laundered money. But high-risk cases can be used to train a model instead. A file review by investigators can help label an appropriate number of cases—perhaps 1,000—as high or low risk based on their own risk assessment. This data set can then be used to calibrate the parameters in a model by using statistical techniques such as regression. It is critical that the sample reviewed by investigators contains enough high-risk cases and that the rating is peer-reviewed to mitigate any bias.

Experts still play an important role in model development, therefore. They are best qualified to identify the risk factors that a model requires as a starting point. And they can spot spurious inputs that might result from statistical analysis alone. However, statistical algorithms specify optimal weightings for each risk factor, provide a fact base for removing inputs that are not informative, and simplify the model by, for example, removing correlated model inputs.

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4. continuously update customer profiles while also considering behavior.

Most customer risk-rating models today take a static view of a customer’s profile—his or her current residence or occupation, for example. However, the information in a profile can become quickly outdated: most banks rely on customers to update their own information, which they do infrequently at best. A more effective risk-rating model updates customer information continuously, flagging a change of address to a high-risk country, for example. A further issue with profiles in general is that they are of limited value unless institutions are considering a person’s behavior as well. We have found that simply knowing a customer’s occupation or the banking products they use, for example, does not necessarily add predictive value to a model. More telling is whether the customer’s transaction behavior is in line with what would be expected given a stated occupation, or how the customer uses a product.

Take checking accounts. These are regarded as a risk factor, as they are used for cash deposits. But most banking customers have a checking account. So, while product risk is an important factor to consider, so too are behavioral variables. Evidence shows that customers with deeper banking relationships tend to be lower risk, which means customers with a checking account as well as other products are less likely to be high risk. The number of in-person visits to a bank might also help determine more accurately whether a customer with a checking account posed a high risk, as would his or her transaction behavior—the number and value of cash transactions and any cross-border activity. Connecting the insights from transaction-monitoring models with customer risk-rating models can significantly improve the effectiveness of the latter.

While statistically calibrated risk-rating models perform better than manually calibrated ones, machine learning and network science can further improve performance.

5. Deploy machine learning and network science tools

The list of possible model inputs is long, and many on the list are highly correlated and correspond to risk in varying degrees. Machine-learning tools can analyze all this. Feature-selection algorithms that are assumption-free can review thousands of potential model inputs to help identify the most relevant features, while variable clustering can remove redundant model inputs. Predictive algorithms (decision trees and adaptive boosting, for example) can help reveal the most predictive risk factors and combined indicators of high-risk customers—perhaps those with just one product, who do not pay bills but who transfer round-figure dollar sums internationally. In addition, machine-learning approaches can build competitive benchmark models to test model accuracy, and, as mentioned above, they can help fix data-quality issues.

Network science is also emerging as a powerful tool. Here, internal and external data are combined to reveal networks that, when aligned to known high-risk typologies, can be used as model inputs. For example, a bank’s usual AML-monitoring process would not pick up connections between four or five accounts steadily accruing small, irregular deposits that are then wired to a merchant account for the purchase of an asset—a boat perhaps. The individual activity does not raise alarm bells. Different customers could simply be purchasing boats from the same merchant. Add in more data however—GPS coordinates of commonly used ATMs for instance—and the transactions start to look suspicious because of the connections between the accounts (Exhibit 2). This type of analysis could discover new, important inputs for risk-rating models. In this instance, it might be a network risk score that measures the risk of transaction structuring—that is, the regular transfer of small amounts intended to avoid transaction-monitoring thresholds.

Although such approaches can be powerful, it is important that models remain transparent. Investigators need to understand the reasoning behind a model’s decisions and ensure it is not biased against certain groups of customers. Many institutions are experimenting with machine-based approaches combined with transparency techniques such as LIME or Shapley values that explain why the model classifies customers as high risk.

Moving ahead

Some banks have already introduced many of the five best practices. Others have further to go. We see three horizons in the maturity of customer risk-rating models and, hence, their effectiveness and efficiency (Exhibit 3).

The journey toward sophisticated risk-rating models

Getting started: how to move from horizon one to two.

Assemble a team of experts from compliance, business, data science, and technology and data.

Establish a common hierarchy of risk factors informed by regulatory guidance, experts, and risks identified in the past.

Start in bite-size chunks: pick an important model to recalibrate that the team can use to develop a repeatable process.

Assemble a file-review team to label a sample of cases as high or low risk based on their own risk assessment. Bias the sample to ensure that high-risk cases are present in sufficient numbers to train a model.

Use a fast-paced and iterative approach to cycle through model inputs quickly and identify those that align best with the overarching risk factors. Be sure there are several inputs for each factor.

Engage model risk-management and technology teams early and set up checkpoints to avoid any surprises.

Becoming an industry leader: How to move from horizon two to three

Begin to build capabilities in machine learning, network science, and natural-language processing by hiring new experts or identifying potential internal transfers.

Construct a network view of all customers, initially building links based on internal data and then creating inferred links. This will become a core data asset.

Set up a working group to identify technology changes that can be deployed on existing technology (classical machine learning may be easier to deploy than deep learning, for example) and those that will require longer-term planning.

Design and implement customer journeys in a way that facilitates quick updates to customer data. An in-person visit to a branch should always prompt a profile update, for example. Set up an innovation team to continuously monitor model performance and identify emerging high-risk typologies to incorporate into model calibration.

Most banks are currently on horizon one, using models that are manually calibrated and give a periodic snapshot of the customer’s profile. On horizon two, statistical models use customer information that is regularly updated to rate customer risk more accurately. Horizon three is more sophisticated still. To complement information from customers’ profiles, institutions use network analytics to construct a behavioral view of how money moves around their customers’ accounts. Customer risk scores are computed via machine-learning approaches utilizing transparency techniques to explain the scores and accelerate investigations. And customer data are updated continuously while external data, such as property records, are used to flag potential data-quality issues and prioritize remediation.

Financial institutions can take practical steps to start their journey toward horizon three, a process that may take anywhere from 12 to 36 months to complete (see sidebar, “The journey toward sophisticated risk-rating models”).

As the modus operandi for money launderers becomes more sophisticated and their crimes more costly, financial institutions must fight back with innovative countermeasures. Among the most effective weapons available are advanced risk-rating models. These more accurately flag suspicious actors and activities, applying machine learning and statistical analysis to better-quality data and dynamic profiles of customers and their behavior. Such models can dramatically reduce false positives and enable the concentration of resources where they will have the greatest AML effect. Financial institutions undertaking to develop these models to maturity will need to devote the time and resources needed for an effort of one to three years, depending on each institution’s starting point. However, this is a journey that most institutions and their employees will be keen to embark upon, given that it will make it harder for criminals to launder money.

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Daniel Mikkelsen is a senior partner in McKinsey’s London office, Azra Pravdic is an associate partner in the Brussels office, and Bryan Richardson is a senior expert in the Vancouver office.

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What Is AML Customer Risk Assessment: Its Importance and How to Do It

Last Updated: March 25, 2024 by Tamas Kadar

Understanding and mitigating customer risk is pivotal to sustaining growth and maintaining a competitive edge. Customer risk assessment serves as a critical tool, enabling organizations to decipher the complexities of customer behavior, financial stability, and potential for fraud or default. This process not only safeguards a company’s assets but also fortifies its reputation, ensuring a trust-based relationship with its clientele. 

While customer risk assessment tools are mandatory for financial institutions, it is essential for all businesses. Failing to perform an adequate risk assessment can cost a lot in fines and leave organizations vulnerable to financial criminals. 

Let’s look more closely at what AML customer risk assessment is, how to do it, and what to consider before implementing it.

What Is AML Customer Risk Assessment?

In the realm of anti-money laundering (AML), customer risk assessment is a critical process where financial institutions evaluate the potential risks posed by customers to prevent money laundering and terrorist financing. 

This comprehensive evaluation includes verifying customer identities, checking customer details against various sanctions lists and analyzing transaction patterns, the services they use and their geographical connections. Conducting a customer risk assessment is a vital part of adhering to AML standards, as it enables financial institutions to pinpoint, comprehend, and lessen the potential risks that might emanate from their client base.

The assessment’s goal is to find out whether a customer poses a money laundering threat, is involved in financing terrorism, is a politically exposed person or appears on any criminal or sanctions lists. 

Implementing standardized AML customer risk assessment ensures that financial organizations can identify potential threats effectively, allowing them to decide on the appropriate level of due diligence. Such measures are vital for safeguarding the integrity of financial systems and maintaining compliance with national and international regulatory standards, ultimately ensuring secure and lawful business operations.

What Does Customer Risk Assessment in AML Involve?

Customer risk assessment is a cornerstone of AML compliance, involving several key steps:

• Customer identification and verification: Institutions must verify the identity of their customers using reliable, independent source documents, data, or information. This process, known as Know Your Customer (KYC), is crucial for establishing the customer’s identity and the legitimacy of their activities.
• AML customer risk scoring: This process involves assigning a numerical score to a customer or transaction based on various risk indicators, which helps in determining the level of scrutiny and monitoring required. This score is calculated using an AML risk scoring model, a tool that helps businesses measure how risky their customers are in terms of money laundering.  It looks at things like what customers do for a living, where they live, and how they use their money. The model gives scores to different risk factors, adds them up, and uses this total score to decide how closely to watch a customer’s activities. If the score is high, the bank may need to look more closely at the customer’s transactions. The model is regularly updated to stay effective and to keep up with new laws and emerging risks.
• Enhanced Due Diligence (EDD): For customers classified as higher risk throughout AML customer risk profiling and found to be politically exposed persons (PEPs) or those from high-risk countries, enhanced due diligence measures are applied. This involves a deeper investigation into the customer’s background, source of funds, and the nature of their transactions.
• Ongoing monitoring: Customer risk assessment is not a one-time process. Continuous monitoring of transactions is essential to detect any unusual or suspicious behavior that could indicate money laundering or terrorist financing.
• Sanction screening: Regularly screening customers against national and international sanctions lists ensures that the institution is not inadvertently facilitating illegal activities.
• Transaction review and reporting: Institutions must review transactions to identify patterns consistent with money laundering. Suspicious activities are reported to relevant authorities as per the regulatory requirements.

By rigorously assessing and monitoring customer risks, financial institutions can detect and prevent illicit activities, ensuring compliance with AML regulations and safeguarding the integrity of the financial system.

The Importance of Assessing Customer Risk

Assessing customer risk is vital across industries, especially in finance, to safeguard against illegal activities and maintain trust. It’s not just about following rules; it’s about being a responsible player in the global financial system. 

Financial institutions use AML customer risk assessment to prevent money laundering and terrorism financing, protecting themselves and their customers. These assessments pinpoint suspicious activities, helping to avert fraud and financial crimes. Moreover, they ensure that resources are focused where they’re most needed, enhancing operational efficiency. 

By understanding the risk each customer poses, institutions can offer tailored services, maintaining compliance and building stronger customer relationships. In a world where financial transactions cross borders with ease, customer risk assessment is the anchor for navigating international regulations and managing global risks. 

Ultimately, it’s about making informed, data-driven decisions to continuously refine risk management strategies, ensuring the financial sector remains robust and trustworthy.

Utilize SEON’s identification technology and advanced APIs to create an onboarding process that is low-friction and high-compliance.

Main Elements of an AML Customer Risk Assessment

AML customer risk assessment is pivotal for financial organizations, ensuring compliance and mitigating risks associated with financial crimes. The two key components of customer risk assessment are risk identification, i.e. reviewing all available information to verify the customer’s identity and detect potential risk factors, and customer fraud scoring to categorize customers based on how great of a risk they pose to the business. 

Customer Risk Identification

Initially, financial institutions need identification proofing documentation to assess a customer’s risk profile. These are some of the main components of identifying customers and spotting potential risk factors:

• Differentiating between individuals vs. entities: Differentiating between individual consumers and legal entities is vital, as each has distinct risk factors associated with their activities.
• Reviewing customer affiliations and profiles: Understanding a customer’s background, including employment history, social connections, and financial behaviors, is crucial. Unusual financial activities, like a jobless individual making substantial deposits, can indicate potential risk.
• Geographic considerations: The risk level can vary based on a customer’s geographic connections. Special attention is needed for transactions in locations that don’t align with a customer’s residence or workplace. Money mules, who carry substantial amounts of cash, often establish accounts in various places to sidestep the requirement of declaring these cash transactions.
• Reviewing services requested by customers: The nature of services a customer seeks can be indicative of risk. For example, frequent inquiries about cash deposit processes or international transfers might warrant closer scrutiny.

Customer Risk Scoring

After evaluating the risk factors, a risk score is assigned to each customer in order to categorize them into different risk levels:

• Low-risk customers: These are individuals or entities with transparent financial activities and clear sources of income whose past transactions align with their profiles.
• Medium-risk customers: This category includes customers with slightly elevated risk levels, possibly due to connections to regions or industries known for financial discrepancies.
• High-risk customers: Customers requiring in-depth due diligence, possibly due to unclear funding sources or significant political connections, fall under this category.
• Prohibited category: Individuals or organizations with a history of financial crimes are barred from engaging with financial institutions.

Understanding and implementing these elements to your customer risk assessment enables you to manage customer risk effectively, ensuring a stable and secure financial environment.

How Long Does It Take to Assess a Customer?

Navigating the digital landscape, businesses, especially non-financial ones, are faced with a critical dilemma: the need to accelerate user actions, like signing up or making purchases, while also mitigating risks and ensuring security. This delicate balance is pivotal as companies strive to eliminate churn, friction and barriers, enhancing user experience. 

Traditionally, acquiring financial services like bank accounts or insurance required submitting extensive personal data for customer risk assessment, often resulting in prolonged wait times. However, with modern advancements, these processes can now be nearly instantaneous, provided you’ve set up the right system in place.

SEON’s 5 Steps To Customer Risk Assessment

Identifying and mitigating risks is paramount for businesses seeking to safeguard their operations and adhere to regulatory standards. SEON offers a comprehensive solution designed to enhance your AML customer risk assessment processes. 

Initial data gathering

The moment a visitor lands on your site, SEON springs into action and starts gathering vital information. 

• IP analysis:  Examine and analyze the user’s IP address to discern their geographic location, detect any use of Tor or VPNs and identify attempts to mask their connection. 
• Device fingerprinting :  A robust method that unveils the unique combination of software and hardware your visitors use to access your site. By understanding the intricacies of their device configuration, browser specifics, and more, SEON not only recognizes returning users but also detects impersonators.
• Digital footprinting:  An additional layer of verification which involves collecting and analyzing information generated by an individual’s entire online presence, utilizing real-time data and checking for a broad range of social and digital signals.

Analyzing the gathered data

SEON also does email analysis, which can unravel significant insights – from the age of the email account and its domain provider to any previous blacklist instances. Similarly, phone number analysis helps determine the type of line, the accuracy of the geographic match, and the authenticity of the network. 

Combining all the above data points, SEON helps you find correlations and anomalies and turn all the gathered information into meaningful insights that lead to faster and more accurate risk assessment. 

PEPs & Sanction Screening

SEON’s AML API  enables businesses to screen their customers’ names against a broad and regularly refreshed array of relevant watchlists. These lists cover all key compliance areas, encompassing checks for politically exposed persons (PEPs), sanctions, and criminal watchlists.

Monitoring transaction for AML

SEON’s  transaction monitoring  proactively safeguards transactions like transfers and withdrawals by analyzing customer data and behaviors to spot potential money laundering signs. It helps you manage transaction volumes and escalate high-risk cases to your fraud teams for further examination. Combining machine learning and human analysis, you can notice patterns in vast data sets, enabling prompt, informed decisions. Enhanced with proprietary data and a user-friendly interface, this approach streamlines compliance and accelerates response to potential risks.

Evaluating risk

The culmination of the assessment is deciding on the risk level associated with a user. In the past, this decision heavily relied on the acumen and intuition of fraud managers. However, with the right risk assessment tool, the process is significantly refined through the use of sophisticated risk scores. These scores are derived from various rules – some pre-established for specific industries, others custom-made or even AI-recommended.

Ultimately, the power lies in your hands. You decide on the balance between stringent security measures, which might increase false positives and a more lenient approach that could allow some fraud risks. SEON empowers you with the flexibility to tailor your fraud and risk prevention strategy to your business’s unique needs, ensuring you maintain control over how you mitigate risk.

Frequently Asked Questions

Customer risk assessment is crucial not only for banks but for any business involved in online transactions, including fintechs, crypto exchanges, online casinos, loan companies, and traditional financial institutions, as it helps differentiate between profitable customers and those who pose potential risks.

To conduct an AML risk assessment, first, individuals and entities must be differentiated to identify distinct risk factors. Review customer affiliations, financial behaviors, and geographic connections for potential risks. Then, evaluate the nature of the services customers seek, like frequent cash transactions or international transfers. Finally, assign a risk score to categorize customers into low, medium, high, or prohibited risk levels based on their profiles and activities. This process ensures effective risk management and compliance in the financial sector.

If your business is involved in financial transactions or services where there’s a risk of money laundering, you’re required to comply with AML regulations, your customers engage in high-risk transactions, or if you operate in sectors or regions prone to financial crimes, a risk assessment tool is essential to identify, evaluate, and mitigate potential risks effectively.

You might be interested in:

• SEON: Guide to Transaction Monitoring Software | Tools & Tips
• SEON: 10 Best-Rated Banking Fraud Detection Software in 2024

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Tamas kadar.

Tamás Kádár is the Chief Executive Officer and co-founder of SEON. His mission to create a fraud-free world began after he founded the CEE’s first crypto exchange in 2017 and found it under constant attack. The solution he built now reduces fraud for 5,000+ companies worldwide, including global leaders such as KLM, Avis, and Patreon. In his spare time, he’s devouring data visualizations and injuring himself while doing basic DIY around his London pad.

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The Essential Guide to Customer Risk Assessment

When you bring in new customers, it's essential to do a customer risk assessment. This helps pinpoint people who might pose a higher risk, and it allows us to take the right steps to prevent money laundering through appropriate measures. In today's fast-changing business environment, it's crucial to understand and manage these risks to ensure ongoing success. This guide delves into the broader concept of risk assessment, emphasizing its significance and the specific factors that impact customer risk.

What Is a Risk Assessment?

Customer risk assessment in the context of Anti-Money Laundering (AML) refers to the process of evaluating the level of risk associated with a particular customer or client within the financial system. AML is a set of regulations and practices designed to prevent the illegal generation of income through activities such as money laundering and terrorism financing. Customer risk assessment is a crucial component of AML compliance and is undertaken by financial institutions to identify, understand, and mitigate potential risks associated with their customers.

Here are key aspects to consider when discussing customer risk assessment in terms of AML:

1. Customer Due Diligence (CDD):

Financial institutions are required to conduct thorough due diligence on their customers to assess the risk they pose. This involves collecting and verifying information about a customer's identity, purpose of the account, nature of the business relationship, and the source of funds.

2. Risk Factors:

Various risk factors contribute to the overall risk assessment of a customer. These factors include the customer's geographical location, type of business, transaction volume, and the complexity of the financial transactions. Customers engaging in high-risk activities or residing in high-risk jurisdictions are subject to more scrutiny.

3. Enhanced Due Diligence (EDD):

In cases where the risk is deemed higher, financial institutions may need to apply enhanced due diligence measures. This could involve obtaining additional information about the customer, monitoring transactions more closely, and assessing the potential exposure to money laundering or other illicit activities.

4. Transaction Monitoring:

Continuous monitoring of customer transactions is essential to detect unusual or suspicious activities. Automated systems are often employed to analyze transaction patterns and identify deviations from the norm, triggering further investigation.

5. Politically Exposed Persons (PEPs):

Individuals holding prominent public positions, known as politically exposed persons, are considered higher risk due to the potential for corruption and misuse of their positions. Financial institutions are required to subject PEPs to enhanced scrutiny and monitoring.

6. Customer Risk Profiles:

Financial institutions categorize customers into different risk profiles based on their assessment. These profiles help determine the level of monitoring and due diligence required. Low-risk customers may undergo standard procedures, while high-risk customers may require more rigorous scrutiny.

7. Documentation and Record-Keeping:

AML regulations mandate the maintenance of comprehensive records of customer due diligence, risk assessments, and monitoring activities. Proper documentation is crucial for regulatory compliance and serves as evidence of the institution's efforts to mitigate AML risks.

8. Ongoing Monitoring:

Customer risk analysis is not a one-time process; it is an ongoing activity. Financial institutions must continuously monitor their customers, regularly update customer information, and reassess risk levels to ensure the effectiveness of their AML compliance programs.

Importance of Assessing Customer Risk

Assessing customer risk is of paramount importance in various industries, particularly in the financial sector, and it serves several crucial purposes. Here's an expansion on the importance of assessing customer risk:

1. Compliance with Regulatory Requirements:

Anti-Money Laundering (AML) regulations require financial institutions to implement robust customer risk assessment processes. Failure to comply with these regulations can result in severe penalties, legal consequences, and reputational damage. By assessing customer risk, institutions demonstrate their commitment to complying with regulatory standards.

2. Prevention of Money Laundering and Terrorism Financing:

Customer risk assessment is a key component in detecting and preventing money laundering and terrorism financing. By evaluating the risk associated with each customer, financial institutions can identify unusual or suspicious transactions that may indicate illicit activities.

3. Protection of Financial Institutions' Reputation:

Inadequate risk assessment can expose financial institutions to reputational risks. If a customer engages in illicit activities, it can tarnish the institution's reputation and erode the trust of clients, investors, and regulatory bodies. Effective risk assessment measures help protect the integrity and standing of the financial institution.

4. Enhanced Operational Efficiency:

Consumer risk management allows financial institutions to allocate resources efficiently. By focusing more on higher-risk customers, institutions can optimize their monitoring efforts and investigative resources, ensuring that resources are deployed where they are most needed.

5. Prevention of Fraud and Financial Crimes:

Assessing customer risk aids in the early identification of potential fraudulent activities. This includes not only money laundering but also other financial crimes such as identity theft, credit card fraud, and cybercrime. Timely detection helps prevent financial losses and protects the interests of both the institution and its customers.

6. Strengthening National Security:

Customer risk assessment plays a crucial role in preventing the financing of terrorism. By identifying and monitoring customers who may be involved in or funding terrorist activities, financial institutions contribute to national and international security efforts.

7. Customer Relationship Management:

Understanding customer risk allows financial institutions to tailor their services based on the risk profile of each customer. This ensures that higher-risk customers receive the appropriate level of scrutiny and that services are provided in a manner that aligns with regulatory requirements.

8. Global Risk Management:

In an interconnected global financial system, assessing customer risk is essential for managing cross-border transactions. It helps financial institutions navigate the complexities of international regulations, cultural differences, and diverse risk environments.

9. Data-Driven Decision-Making:

Customer risk assessments provide valuable data that can inform strategic decision-making within financial institutions. This data-driven approach allows for the continuous improvement of risk management strategies and the adaptation of policies to evolving threats.

10. Prevention of Regulatory Sanctions:

Regular customer risk assessments contribute to ongoing compliance with changing regulatory requirements. This proactive approach helps financial institutions avoid regulatory penalties and sanctions, ensuring a smoother operational environment.

Customer Risk Factors

Customer risk factors encompass various elements that financial institutions consider when evaluating the level of risk associated with a particular customer. These factors help in determining the likelihood of a customer being involved in money laundering, fraud, or other illicit activities.

1. Geographic Location:

Customers residing in jurisdictions known for high levels of corruption, weak regulatory frameworks, or a history of financial crimes may pose a higher risk. Financial institutions often assess the risk associated with a customer based on their geographic location.

2. Business Type and Industry:

Certain industries are inherently more susceptible to money laundering and other financial crimes. Businesses involved in cash-intensive activities, high-value transactions, or those lacking transparent financial structures may be considered higher risk.

3. Transaction Patterns:

Unusual or complex transaction patterns, particularly those inconsistent with a customer's known business activities, may raise red flags. Rapid and significant changes in transaction volumes, frequency, or size can indicate potential risks.

4. Source of Wealth and Income:

Understanding the legitimate source of a customer's wealth is crucial. If the source of income or wealth is unclear, unverifiable, or inconsistent with the customer's profile, it can be indicative of higher risk. Financial institutions often scrutinize large, unexpected inflows of funds.

5. Customer Behavior:

Unusual behavior, such as frequent changes in account information, reluctance to provide necessary documentation, or attempts to avoid regulatory scrutiny, may signal potential risk. Behavioral analysis is a crucial component of customer risk assessment.

Customer Risk Levels

Customer risk levels refer to the categorization of customers based on the assessment of factors that may expose them to potential financial crimes, such as money laundering, fraud, or terrorism financing. The goal is to stratify customers according to their risk profiles, allowing financial institutions to allocate resources and implement appropriate risk mitigation measures.

1. Low-Risk Customers:

Characteristics : Customers with transparent and verifiable sources of income, a clear business purpose, and a history of compliance with regulatory requirements are typically considered low risk.

Risk Mitigation : Low-risk customers may undergo standard due diligence procedures. Transaction monitoring is conducted with a standard level of scrutiny, and routine reviews of customer profiles are performed periodically.

2. Medium-Risk Customers

Characteristics : Customers with moderate risk may have some factors that warrant closer attention, such as involvement in industries prone to money laundering or transactions with certain risk indicators.

Risk Mitigation : Enhanced Due Diligence (EDD) measures are applied to medium-risk customers. This may involve more in-depth verification of identity, additional documentation requirements, and increased transaction monitoring.

3. High-Risk Customers:

Characteristics : High-risk customers exhibit multiple risk factors, such as complex ownership structures, involvement in high-risk industries, or transactions that deviate significantly from established patterns.

Risk Mitigation : High-risk customers are subject to rigorous scrutiny and monitoring. Enhanced Due Diligence (EDD) is applied extensively, involving thorough background checks, source of funds verification, and continuous transaction monitoring. These customers may require senior management approval for onboarding or continued engagement.

4. Politically Exposed Persons (PEPs):

Characteristics: PEPs, due to their public positions, are considered inherently high risk. This includes government officials, diplomats, and individuals with close associations to such positions.

Risk Mitigation: PEPs are subject to the highest level of scrutiny. Enhanced Due Diligence measures are mandatory, and transactions are monitored with extreme diligence. Regular reviews and reporting obligations are intensified for PEPs.

5. Emerging Risk or Changing Risk Levels:

Characteristics : Customers may experience changes in their risk profile due to evolving business activities, regulatory changes, or shifts in ownership.

Risk Mitigation : Financial institutions must proactively monitor and reassess customer risk levels. If there are changes in a customer's circumstances, appropriate measures are taken, such as updating due diligence information, conducting additional investigations, and adjusting risk mitigation strategies accordingly.

6. Automated Risk Scoring:

Characteristics : Some financial institutions employ automated risk-scoring systems that use algorithms to assess various risk factors and assign a numerical score to customers.

Risk Mitigation : Based on the automated risk score, customers are categorized into risk levels. Higher scores may trigger additional scrutiny, while lower scores may result in standard due diligence procedures.

7. Dynamic Risk Assessment:

Characteristics : Risk levels are not static and can change over time based on customer behavior, market conditions, or regulatory developments.

Risk Mitigation : Regular and ongoing monitoring allows for dynamic risk assessment. Financial institutions continuously update customer profiles, reassess risk levels, and adjust risk mitigation measures as needed.

Dynamic AML Customer Risk Assessment

Dynamic AML customer risk assessment refers to an approach where the evaluation of a customer's risk is not a one-time activity but an ongoing and adaptable process. It involves continuously monitoring and reassessing the risk associated with customers based on evolving factors, such as changes in customer behavior, market conditions, regulatory developments, and other relevant circumstances. Here's an expansion on the concept of dynamic AML customer risk assessment:

1. Continuous Monitoring:

Dynamic AML customer risk assessment involves the continuous monitoring of customer transactions, behavior, and other relevant activities. Automated systems and analytics are often employed to detect patterns and anomalies in real-time or near-real-time.

2. Real-Time Data Analysis:

The use of advanced data analytics allows financial institutions to analyze vast amounts of data in real-time. This includes transaction data, customer information, and external data sources to identify unusual patterns or behaviors that may indicate increased risk.

3. Behavioral Analysis:

Dynamic risk assessment places a strong emphasis on behavioral analysis. By establishing a baseline of normal customer behavior, financial institutions can quickly identify deviations that may signal potential risks. Unusual transaction patterns, changes in account activity, or unexpected shifts in behavior trigger further scrutiny.

4. Trigger Events:

Trigger events, predefined indicators or thresholds, are set to automatically prompt a reassessment of customer risk. These triggers can be based on transaction amounts, frequency, geographic locations, or other relevant factors. For example, a sudden increase in transaction volume may trigger a reevaluation.

5. Event-Driven Updates:

Changes in a customer's profile or external events, such as regulatory updates or sanctions, trigger automatic updates to the customer's risk assessment. This ensures that risk levels are promptly adjusted in response to changes in the customer's circumstances or the external environment.

Tookitaki's Dynamic Risk Scoring Solution

Tookitaki's Dynamic Risk Scoring solution is a game-changer in the world of risk management for financial institutions. By adopting a data-driven approach, this solution allows for continuous improvement and adaptation of risk management strategies in response to evolving threats. One of the key benefits of this solution is the prevention of regulatory sanctions. By conducting regular customer risk assessments, financial institutions can ensure ongoing compliance with changing regulatory requirements.

This proactive approach helps them avoid penalties and sanctions, creating a smoother operational environment. The solution takes into account various customer risk factors, such as geographic location, business type and industry, transaction patterns, source of wealth and income, and customer behavior. By analyzing these factors, financial institutions can categorize customers into different risk levels, from low-risk to high-risk customers and politically exposed persons (PEPs). This allows them to allocate resources and implement appropriate risk mitigation measures based on each customer's risk profile.

Additionally, the solution incorporates automated risk scoring systems and dynamic risk assessment to ensure that risk levels are continuously monitored and adjusted as needed. With its focus on continuous monitoring, real-time data analysis, behavioral analysis, trigger events, and event-driven updates, Tookitaki's Dynamic Risk Scoring solution provides financial institutions with the tools they need to effectively manage customer risk and stay compliant in an ever-changing regulatory landscape.

Customer risk assessment is a cornerstone of effective risk management for businesses. By understanding and evaluating the potential risks associated with individual customers, businesses can protect their financial interests, comply with regulations, and foster a secure and trustworthy environment. Embracing a dynamic approach to customer risk assessment ensures that businesses stay ahead of evolving risks, contributing to long-term success.

1. What is a customer risk assessment?

A customer risk assessment is the process of evaluating and analyzing the potential risks associated with engaging with a particular customer.

2. How to identify the need for customer risk assessment?

The need for customer risk assessment arises from the desire to safeguard financial interests, comply with regulatory requirements, and create a secure business environment.

3. How can technology assist in customer risk assessment?

Technological tools, such as data analytics, artificial intelligence, and machine learning, play a crucial role in customer risk assessment.

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How can you elevate your AML risk assessment?

In our ever-evolving digital world, technology has changed the way that we make payments, as well as our ability to send money at any time, anywhere in the world.  It has also made it easier for fraudsters to conceal the origins of illegally obtained funds, making them appear to come from a legitimate source.  Indeed, with money laundering schemes costing some 2-5% of the global GDP – up to 30% of that figure originating in the US alone (costing upwards of $300B a year) – it’s pertinent that businesses respond appropriately to the guidance of authoritative and regulatory bodies worldwide. This is where the anti-money laundering (AML) risk assessment comes in.

Let’s take a deep dive into why an AML risk assessment is necessary and the best practices for conducting an effective AML risk assessment as part of a larger AML compliance program.

What is an AML risk assessment?

An AML risk assessment is a key component of any AML tool kit, enabling businesses to measure the likelihood that a customer or client is involved with money laundering or terrorist financing. An AML risk assessment will measure the risk level of each client, performing due diligence to minimize any potential involvement in a money laundering scheme.

Who conducts an AML risk assessment?

Ultimately, an AML risk assessment is a worthwhile process for any organization that conducts financial transactions. Regulators worldwide have made it mandatory for financial institutions under the AML and Counter-Terrorism Financing (CTF) laws and regulations to take the appropriate preventative measures against such financial crimes, or else risk serious penalties and regulatory audits.

How is AML regulated?

To combat AML worldwide, the Financial Action Task Force (FATF), an inter-governmental body that sets standards to guide countries to develop and update their AML and CTF laws, has been created. The FATF includes 39 members and 37 member jurisdictions , as well as the European Commission and the Gulf Cooperation Council.

Specifically (and for example), the USA has the Bank Secrecy Act ( BSA ) and the US Patriot Act , Canada has the Proceeds of Crime (Money Laundering) and Terrorist Financing Act,  Australia has the AML/CTF Act , while Europe is guided by a series of legislative directives, including the most recently released Sixth AML Directive ( 6AMLD ).

The five steps to performing an AML risk assessment

While completing an AML risk assessment is necessary to comply with regulations, understanding the risk level of each client and transaction also protects your business and your reputation.  Below are five steps to follow to ensure compliance and protection.  

1. Document key risk indicators

The first step for conducting an AML risk assessment is to create the appropriate documentation regarding key risk indicators (KRIs) and, in turn, how they relate to your business. This documentation will outline the support for the risk analysis. Remember – document everything, including your thought processes. As information changes and evolves, it helps to have everything cataloged to be sure your processes stay up-to-date and relevant.

Common categories of KRIs that should be documented include:

Clients/Customers/Business entities:  Which type of individuals do you do business with? Are they who they say they are? Some will have a higher risk, such as:

• Politically Exposed Persons (PEPs)
• Non-Resident Aliens
• Professional Service Providers

Be sure to complete a sanction screening to confirm that any individual you are working with is not on any sanction lists. And remember, doing business with PEPs is not necessarily banned, it is simply deemed high risk.

Meanwhile, if your client is a business entity, ask yourself who ultimately controls or benefits from their activities? Be sure to cross-reference any information on file with records kept at the company’s house and other beneficial ownership registers.

Products/Services:  It’s important to understand and analyze the risks associated with the products and services you offer. For example, the following comes with higher risk:

• Remote deposits
• Probate services
• Gambling services
• Cryptocurrency services
• ATM and cash services
• Foreign correspondent accounts
• Loan portfolios
• Online account opening and access

When providing a higher-risk service, keep a lookout for any red flags associated with your customer’s behavior. For example, ask yourself: Are the services they require consistent with their business rationale?

Delivery channels:  It’s a good idea to remember that some delivery channels can increase money laundering risk, especially if they can disguise the true identity of the client’s activity. Remember to consider whether the service/product will be delivered in person or remotely or provided directly or via an intermediary.

Geographic location:  A core component of any AML risk assessment is identifying the geographic locations that pose a higher risk. For example, do you operate in an area where there are higher rates of drug trafficking? To be thorough, confirm geographic risk through a list from the FATF or other such organizations.

And don’t forget, your customer doesn’t need to be in a foreign land to set off a red flag. If they are in a different city or province, enquire as to why they are coming to you instead of seeking a similar service closer to them, geographically.

Transactions:  Naturally, an AML risk assessment will involve the evaluation of the type of transactions your business engages in. For example, how does the number of international wire transfers compare to domestic ones? Or what is the volume of loan transactions and private ATM customers?

2. Employ dedicated staff

No matter the size of your organization, ensuring adequate staff is employed to dedicate time to compliance is essential when conducting your AML risk assessment.  

3. Identify the inherent risk

Inherent risk represents the exposure your business will have to money laundering risk should you not put any processes in place to mitigate them. This step of identifying the inherent risk builds upon your documentation process in step one.

Once you have identified the inherent risks to your organization, you need to implement controls to reduce them. These can be broken down simply into three categories: weak, adequate and strong.

4. Determine the residual risk

Once you have identified the inherent risk to your organization and, in turn, the effectiveness of the internal control environment you have in place, you can move on to determining the residual risk. This category of risk is defined as the risk that remains once controls have been put in place to mitigate the inherent risk. In other words, what gaps in your controls are present that could enable money laundering?

5. Rate the risk

Best practice involves applying a three-tier rating scale to assess the risk of money laundering or terrorism funding occurring, identified as high risk, moderate risk or low risk. Should the risk be rated high, your mitigation efforts are not effective enough and additional risk management measures should be implemented immediately. Ultimately, the strength of your controls can help determine the risk score. For example, when there are adequate controls in place, risk ratings might reduce from a three to a two.

Furthermore,  best practice dictates one assess the risk at all levels of AML-regulated business. This means that a risk assessment should be conducted at the following levels:

• The transaction level (by whomever is dealing with the transaction)
• The customer/client level (by whomever is dealing with the customer)
• The business level (by the appropriate individual in senior management/legal/compliance)

Finally, when appropriate, it never hurts to go one step further and perform a risk assessment at the sectoral level, the national level and the international level.

Cultivate a culture of compliance

Remember, the AML risk assessment process is an ongoing one. By cultivating a culture of compliance and conducting regular audits of your processes, you can be sure your organization remains aligned with regulatory changes and minimizes the likelihood of risk affecting your business and reputation.

Unfortunately, despite the risk assessments, controls and strict processes we implement, financial fraud is evolving faster than ever. In fact, in 2022, financial services businesses saw a 79% increase in document fraud compared to the previous year. Given the state of the current economic climate, this situation isn’t predicted to settle anytime soon.

Therefore, in an environment so fraught with fraud, going beyond the regulated assessment requirements is recommended. As we have discussed in previous blogs dedicated to KYC compliance , embracing a digital transformation strategy is a must. What this means is balancing your obligations to AML assessments and compliance with innovative, digital identity verification that can help protect your business against the latest sophisticated fraud trends without impacting the customer experience.

In fact, by enhancing your approach to AML (and KYC) compliance with comprehensive online capabilities like digital identity verification pre-AML risk assessment, you will not only better mitigate sophisticated fraud attacks, such as synthetic identities , but also provide an even more seamless customer experience from the very first touchpoint – account creation.

Want to discover how you can go beyond best practices for conducting your AML risk assessment with digital identity verification? Contact us today.

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Managing AML risk assessment: tools for customer evaluation

As technology continues to advance, the financial and crypto-asset sectors have become more complex, and crimes have become more sophisticated and technologically advanced, making detection and AML risk assessment ahead with AML risk scoring more difficult.

This leaves firms vulnerable to criminal activity. The question of how to “separate the wheat from the chaff” and find the bad actors among a bunch of perfectly legitimate customers is more important than ever. The risk-based approach and perfectly working AML risk assessment could be the answer, but only if it is applied correctly: you could be prepared to stay on the safe side with the regulator while ensuring uninterrupted service to your customers.

This blog explores tools and techniques for evaluating anti-money laundering  (AML) risk management solutions. It considers regulatory requirements and the need to prevent criminal use. Also, it addresses the business need for the best customer experience. Operating profitably is another crucial aspect to consider.

Understanding the importance of AML risk assessment in AML/CFT compliance programs

In simple terms, the risk-based approach is just a fancy term for segmenting your customer portfolio into groups. It filters out potential wrongdoers from those without concerns, helping to identify any links to criminal activity.

AML risk assessment is another word combination used by the regulator that indicates the same approach – don’t be chaotic, use your resources wisely, don’t bother customers who are not risky and focus your efforts on customers who are possible criminals or associated with criminal activity.

A risk-based approach is at the heart of any AML/CFT compliance programme and rests on two pillars: holistic (enterprise-wide or business-wide) risk assessment and targeted (individual customer) risk assessment.  ML/TF risk assessment should be an integral part of the firm’s overall risk management framework and target the basic steps of risk management: risk identification, risk assessment, risk control, and risk mitigation or avoidance (the latter should be used carefully and should not lead to de-risking of the entire client group).

Sounds simple? In theory it is but putting it into practice raises a number of issues. The wrong risk-based approach can result in unhappy customers burdened with unnecessary due diligence. It can also waste resources and miss criminal activity.

Here are some tips from our experts on how to approach risk assessment.

Holistic customer segmentation or Enterprise-Wide Risk Assessment (EWRA)

If you have a ‘chicken or the egg’ conundrum, the answer is simple – enterprise-wide risk assessment always comes first. If you are a start-up, the holistic view of your ML/TF risks should be based on your business plan, which should be updated later with actual data.

Enterprise-wide risk assessment (or EWRA) is not a standalone exercise undertaken simply to satisfy the regulator. If done properly, EWRA could give you an answer on your target customer profile based on “peer grouping” and this already sets some thresholds for further individual customer risk scoring and transaction monitoring . EWRA could give you some insight into:

• The ML/TF risks of your target customers and the weaknesses in the AML/CFT controls applied to these customers (or possible risks and possible controls if you are in the start-up phase);
• How to establish individual customer ML/TF risk assessment criteria, including criteria for triggering enhanced due diligence;
• How to tailor your transaction monitoring model: setting thresholds and limits for certain rules, customizing the frequency and intensity of transaction monitoring for certain customer groups;
• Determine the basis for calculating the actual resources required to implement the necessary AML/CFT controls.

Importance of quantitative data

Quantitative data should form the basis of the assessment of inherent ML/TF risks (either actual data over the selected business period or business plan), so data quality must be ensured, including data accuracy, so that the company can be confident that it is implementing the necessary AML/CFT controls:

Accuracy, so that the company can be confident that material distortions of the actual AML/TF results are avoided;

Completeness (including data from all business units).

The larger companies are using more sophisticated tools to obtain statistics from their internal databases, but so far it is still a challenge to ensure that accurate and complete data would feed into the EWRA results.

To ensure that the residual ML/TF risk is properly assessed, an overview of AML/CFT controls is required. Compliance reports, audit reports, reports on the results of monitoring back-testing, reports on operational risk incidents could be the source that the firm would be willing to examine before deciding whether the controls are adequate.

The assessment of residual risk is subject to the risk assessment model used by the entity. As with all risk assessment models, the risk assessment model used for EWRA should be validated.

Targeted risk assessment or individual customer risk assessment

The data collected from customers (Know Your Customer, or KYC data) forms the basis for the individual customer risk assessment. When developing KYC questionnaires, the firm should use the results of the EWRA and consider having more comprehensive questionnaires for those customer segments that are exposed to higher risks and possibly simplified KYC questionnaires for those that do not raise concerns.

However, an individual client poses an individual risk relative to his or her peer group, and this should also be considered. For example, a corporate customer domiciled in a low-risk country and using only domestic payment initiation services may pose a different risk to the same customer that expands its services to include cross-border payments to and from high-risk countries.

The higher risk clients will be subject to enhanced due diligence procedures, which will include not only additional data collection (e.g., on source of funds and assets), but also enhanced monitoring and senior management involvement in the client onboarding decision process. Therefore, to avoid overburdening the business with additional processes, you may be willing to have an accurate client AML risk scoring tool that addresses ML/TF risks in a way that satisfies the regulator and keeps the process as burdensome as possible for the business and, later, its clients.

Things to consider when developing AML risk scoring model

In developing a AML risk scoring model, you may wish to consider:

whether the AML risk scoring model meets all the mandatory criteria set by the regulator (client, geography, product, channel);

whether the AML risk scoring model takes into account the mandatory high-risk situations set by the regulator (e.g. an automatic high-risk score could be applied if the customer is a politically exposed person, registered in the high-risk country, etc.);

if the weighting of the risk criteria is not unduly influenced by a single factor and/or does not lead to a situation where it is impossible to classify any business relationship as high risk;

if it is possible to override the automatically generated risk score if necessary;

where the individual customer risk score is reviewed on a regular basis or when trigger events occur (e.g. when the customer wishes to take out a new product or service, when a certain transaction threshold is reached, etc.);

where the customer re-scoring is applied when there are significant changes to the AML risk scoring model or when there are significant changes to components of the AML risk scoring model (e.g. significant changes to the geographical risk score due to external factors such as inclusion of the country on the FATF grey or black list).

Although KYC data is an important part of the risk assessment, the company should consider including internal and external data sources as additional information that could be evaluated as additional customer risk criteria, such as customer behavior, transaction history, internal investigation data, adverse media screening information, regulatory or law enforcement inquiries.

Validation of risk assessment models

Assessing the risk of money laundering in a business or financial institution. By analyzing customer and transaction data, AML risk assessment helps organizations determine the likelihood of money laundering activities and implement effective risk management strategies to mitigate these risks.

The primary objective of AML risk assessment is to identify potential risks and vulnerabilities in an organization’s operations, systems and processes. This process enables organizations to develop risk management plans that address any weaknesses and vulnerabilities and prevent or mitigate money laundering risks. Effective AML risk assessment and management plans can help organizations avoid hefty fines, reputational damage and legal repercussions.

Risk assessment tools

To effectively manage AML risks, organizations can use a variety of tools. One of the most common techniques is risk scoring, which involves assigning scores to customers based on their risk level. By analyzing data such as transaction history, location and occupation, organizations can identify customers who pose a higher risk of money laundering.

Transaction monitoring is another tool that enables businesses to assess and flag suspicious transactions in real time. This can be achieved using algorithms that look for patterns and anomalies that may indicate money laundering activity.

Risk management techniques

Once organizations identify money laundering risks, they must implement effective risk management techniques. These techniques are crucial for mitigating the identified risks effectively. Rules-based monitoring is one such technique that organizations can use to identify suspicious transactions. This involves creating specific rules to help identify suspicious transactions based on pre-defined criteria.

Another effective risk management technique is to train employees to identify and report suspicious activity. Achieve this through regular training sessions. Educate employees about money laundering risks and spotting red flags.

Statistics on AML risks in the digital age

Criminals are increasingly using digital channels to launder money, according to a report by the Financial Action Task Force (FATF) . The report states that “the number of cases in which virtual assets have been used for money laundering has increased rapidly in recent years”. This highlights the importance of implementing effective AML risk assessment and management strategies in the digital age.

The report also identifies some of the key challenges organizations face in managing AML risk in the digital age. These challenges include the complexity of digital transactions, the lack of regulation in some jurisdictions and the use of new technologies such as virtual currencies and online payment systems.

In today’s fast-paced digital world, money laundering poses a significant threat to businesses and financial institutions. But with the right tools and techniques, it’s possible to stay one step ahead of potential risks. By implementing AML risk assessment and management strategies, organizations can protect themselves and their customers from the damaging effects of fraudulent activity.

Effective AML risk assessment and management plans can help businesses avoid hefty fines, reputational damage and legal repercussions. So whether you’re a seasoned financial professional or just starting out in the industry, now is the time to take action and protect your business from the ever-evolving threats of money laundering. Remember, an ounce of prevention is worth a pound of cure!

Conclusions

You should consider the mandatory criteria set by the regulator, but should also take into account the specifics of your business model:

• When considering customer risk, you may want to consider what part of your business will be focused on individual customers and what part of your business will be focused on businesses. When analyzing the latter, consider the type of companies you will be serving (e.g. private or public companies), the industries these companies represent (e.g. gambling, finance, real estate, precious metals, crypto asset exchanges, sports, cash-intensive businesses, etc.) and other possible customer groups.
• When considering product/service risk, carefully analyze their business model and cash flow schemes. When analyzing products and services, ask yourself whether you really understand the AML/CFT requirements associated with the services you provide (e.g. if you offer BaaS or related banking services).
• Different countries may pose different challenges due to differences in AML/CFT frameworks, so you may want to consider the location of the target customer, the direction of the money flow, and the ML/TF risks associated with it.
• If you are planning to use the network of agents or intermediaries, do not forget to include them when considering the service channel risk.
• When analyzing the customer group, the firm should identify possible ML/TF risks associated with this group and identify control weaknesses in order to take the necessary risk mitigation measures.

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A Comprehensive Framework for AML Risk Assessment

Table of contents

Identifying and mitigating aml risks, the importance of aml risk assessment, challenges associated with an aml risk management program, developing a framework to implement an effective aml risk assessment program, optimize your approach to risk assessments with finscan, about the author.

In today’s data-driven world, financial institutions have unprecedented access to vast amounts of information about their customers and transaction activities. However, effectively using this data landscape to assess financial crime risk poses a significant challenge.

Many organizations grapple with poor data quality and struggle to build a risk scoring model that accurately evaluates the risk of financial crime within each business relationship. While the promise of data science and artificial intelligence (AI) hold immense potential for the future, financial institutions still rely on rules-based models that aggregate data from multiple sources to derive a risk rating. These models require regular fine tuning to gauge their efficacy in evaluating financial crime risk.

In this article, we explore the essential relationship between data quality and risk scoring models, introducing a framework that bolsters the accuracy of Anti-Money Laundering (AML) risk evaluation. Leveraging 20+ years of experience in AML consulting and technology, we present actionable insights, industry best practices, and advanced methodologies to help organizations unlock the full potential of their risk assessment.

AML risk assessment is a thorough, systematic process designed to detect, evaluate, and mitigate the risks of money laundering and terrorist financing linked to a business relationship. This involves identifying and examining crucial risk factors to understand the AML risk exposure of financial institutions. This allows them to pinpoint customers with a higher money laundering risk and implement appropriate, risk-based strategies for preventing money laundering. Assessing customer risk is a fundamental component of a financial institution’s overall AML risk evaluation.

By implementing an effective AML risk assessment framework, financial institutions can proactively identify and assess the likelihood and potential impact of financial crimes within their operations. This enables them to allocate resources, implement proper controls, and prioritize their efforts to effectively manage and mitigate the risks related to money laundering and terrorist financing.

Central to the customer AML risk assessment is a risk model that calculates a risk score, or a risk rating, such as high, medium, or low. This risk score or rating provides the AML Officer and the business line with a clear image of the risks the customer relationship and activities pose to the institution.

An AML risk assessment enables organizations to adopt a risk-based approach to combat financial crime and meet regulatory expectations. Through thorough assessments, organizations demonstrate their commitment to compliance while efficiently allocating resources and applying enhanced scrutiny to high-risk customers. This strategic approach not only ensures regulatory compliance but also strengthens the organization’s ability to detect and prevent financial crime, safeguarding the integrity of the financial system.

Establishing and supporting an effective AML risk management program comes with various challenges that can affect its success. These challenges need careful consideration and proactive measures to ensure compliance and better manage financial and reputational risks. Key challenges associated with effective AML risk management programs include:

• Data quality : AML risk assessment is dependent on accurate and comprehensive customer and transaction data. Inadequate, inconsistent, or inaccurate data can impede the effectiveness of risk assessments.
• Infrequent data updates : Regular updates of customer information, such as occupation, industry, and address and externally sourced information such as adverse media are vital to supporting accurate risk assessments and avoiding reliance on obsolete data.
• Data integration challenges : Integrating data from various internal and external sources, such as customer databases and transaction records, can be challenging due to differences in formats, systems, and data quality issues.
• Risk scoring models : Risk scoring models must be robust, well-designed, fully documented, and regularly validated and refined to ensure full and effective risk assessments.
• Real-time risk detection : The ability to refresh risk profiles in real time based on continuous monitoring activities, including analyzing transactions, screening against watchlists, and assessing changes to customer attributes, is pivotal for dynamic AML risk assessment.
• Resource limitations : Comprehensive risk assessments demand competent personnel, a robust technological infrastructure, and access to reliable data sources. These requirements can be challenging to resource constrained organizations.

To set up an effective AML risk assessment program, financial institutions should adhere to a structured framework. This framework can enhance an institution’s risk assessment capabilities and help align it with regulatory requirements. It is important to remember that AML risk assessment is an iterative process necessitating regular revisions and continuous improvement.

• Develop the risk assessment framework and method : Outline the risk assessment’s scope, goals, and methodology. Determine the assessment frequency, responsible personnel, and available resources. Ensure compliance with regulatory mandates and industry-leading practices. For help, contact our FinScan AML consulting team.
• Identify risk factors : Identify the relevant risk factors that apply to your institution, considering aspects like the nature of your business, customer demographics, products/services, delivery channels, geographic locations, transaction monitoring alerts, and watchlist screening results.
• Collect and evaluate data : Gather relevant data from internal and external sources. This may include customer information, transaction data, external risk indicators, typologies, industry reports, regulatory guidance, and intelligence sources. Ensure data quality and completeness for accurate risk assessment.
• Assess inherent risk : Evaluate each identified risk factor to determine its inherent risk level. Consider the probability and potential impact of money laundering and terrorist financing activities associated with each factor. Use historical data, industry trends, typologies, and regulatory guidance to define the best level of risk assessment.
• Build a risk model : Develop a risk scoring method to quantify the identified risks. Assign risk scores or ratings to each risk factor based on its significance, likelihood, and potential impact. This aids in prioritizing risks and allocating resources effectively. Include both qualitative and quantitative factors in the scoring process.
• Mitigate and control risks : Identify and implement suitable risk mitigation measures for each risk profile. These might include enhanced customer due diligence, transaction monitoring, sanctions screening, staff training, internal controls, and governance practices. Implement controls that are proportional to the risk level and comply with regulatory requirements.
• Monitor and review : Continuously monitor and review the effectiveness of risk mitigation measures and the overall risk assessment framework. Regularly update risk assessments to accommodate changes in the institution’s risk profile, regulatory landscape, emerging risks, and industry best practices. Maintain a feedback loop to improve the risk assessment process over time.
• Report : Generate reports for management, regulators, and internal stakeholders to communicate risk exposure, mitigation actions, and the effectiveness of the AML program.

Establishing an effective AML risk assessment framework can seem daunting. The obligation to comply, manage risk factors, and evaluate their potential influence on money laundering activities can often seem overwhelming. Moreover, gathering data from multiple sources, often in an imperfect state, and building a model that accurately represents the level of money laundering risk, can add to this complexity.

However, the process doesn’t have to be so complicated. At FinScan, we provide a unique combination of AML consulting services , data quality proficiency, and advanced risk scoring technology . We help organizations in setting up a robust risk assessment program that not only fulfills regulatory requirements but also delivers a comprehensive understanding of their exposure to money laundering risks. Our team of experts will guide you through the entire process, from identifying pertinent risk factors to creating a customized risk model tailored to your specific needs.

Steve Marshall is the director of FinScan Advisory Services. He brings more than 40 years’ experience in the area of risk management, specializing in anti-money laundering (AML) compliance. Having served in a number of roles at US and global financial institutions, Steve honed his skills navigating the complex landscape of regulatory compliance in financial services. His reputation as a trusted advisor to organizations worldwide was further solidified in his subsequent role as a principal in the financial crimes enforcement group at a Big 4 firm, where he guided the successful implementations of AML programs within the banking and financial services sector.

At the helm of FinScan’s Advisory Services, Steve leverages his wealth of experience to assist organizations in establishing robust AML programs. Recognizing the vital role that data quality plays in driving effective watchlist screening, Steve emphasizes the critical importance of utilizing good data in conjunction with cutting-edge technology to drive AML program effectiveness.

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AML Risk Assessments: Developing and Implementing a Plan for Your Organization

Anti-Money Laundering (AML) processes are designed to prevent illegal money transactions that  hide the source of funds earned from or funded for criminal activity. One of the best ways to improve your company’s security against these transactions is to develop a thorough risk assessment procedure. Although the law does not specifically require that you develop a risk assessment program, your company would be remiss if it did not.

Ignorance is not a defense when it comes to government-imposed money laundering and AML penalties. Your organization will suffer financial harm and reputational damage if you do not implement strong AML measures to lower your risk exposure. An AML risk assessment plan will help protect you from these financial crimes.

Are AML Risk Assessments Required?

Although risk assessment procedures are not specifically required by law, proper monitoring of customer accounts, individual transactions and all suspicious activity is. The Bank Secrecy Act (BSA) in the U.S. and other regulations around the world do mandate individual testing to assure compliance, so adopting a risk assessment procedure is a necessary step for financial institutions and other money-intensive companies at high risk for money laundering abuses. These businesses include liquor stores, casinos, convenience stores and parking garages.

AML risk assessments are an essential part of preventing financial crimes and following regulatory mandates. According to The Federal Financial Institutions Examination Council (FFIEC),  assessments should include identifying risk categories specific to the financial services organization, such as customers, services, locations and products. After identifying the key risk areas, organizations should put processes in place to evaluate the risk within each category. Doing so proves to regulators that the company is making a good-faith effort to thwart financial crimes.

How AML Risk Assessments Work

Risk assessments identify your organization’s areas of vulnerability, which lets you determine how to correct problems in your AML efforts. Your risk assessment structure will depend on the size and organization of your business and the types of products and services it offers.

Basic risk factor categories in AML you must consider while creating your risk assessment include:

• Your customer types
• The geographical locations of your customers and their organizations
• Customer activities
• The products and/or services you offer (business lines)
• How customers find your company
• How your company makes transactions — checks, wire transfers, cash, etc.
• Origins of your customers’ funds

Assessing these factors will help you identify financial crimes such as terrorist financing, bribery and corruption. You can only avoid government sanctions and the wrath of FinCEN and other regulatory agencies by identifying risks and then taking steps to mitigate them.

When you run your money laundering risk assessment model, you will be able to determine a risk rating and risk range for your clients, judging if they are low, medium or high risk for money laundering. Taking this risk-based approach helps you nurture business relationships with legal clients and lower your overall risk of violating AML regulations.

What Are the Main Indicators of Money-Laundering Risk?

The main indicators of money-laundering risk for most businesses are products and services, customer profiles and geographic location.

Products and Services

The nature of your products and services helps dictate the level of risk for money laundering in your organization. For instance, if you deal with a high number of electronic payments, your risk rises. This is because criminals use websites to accept payments and then reroute the money through other websites for legitimate businesses such as bookstores or clothing retailers. The basic concept is the same as older financial crimes, but the digital nature of today’s money laundering makes it harder to trace and shut down.

Some companies have higher levels of suspicious activity and overall risk. Any business where lots of cash changes hands is vulnerable to money laundering. It’s fairly simple to falsify income versus expenditures so that the “dirty money” appears to have been earned legitimately.

ATMs, restaurants and casinos are popular choices of money launderers. New companies and new products can also more easily hide suspicious activity, making them higher risk because regulators have no information on either. The number of new enterprises is huge, so it takes time to catch up to new criminal efforts.

Certain customer types are at higher risk than others. If you work with many cash-intensive businesses, you are more prone to compliance issues because of their compromised behavior.  You must assume that at least some of these organizations are engaged in illegal activity.

Any company that deals with many high-profile clients such as politicians and entertainers is at risk for money laundering. These people are vulnerable to blackmail or might be trying to avoid government taxes. It pays to be alert to potential problems with these politically exposed persons (PEPs) .

Often, excessive dealings with foreign entities are a red flag, especially if they are countries with lax financial laws. Laundering money through off-shore accounts is one historically successful way to avoid AML enforcement.

You need to carefully assess customers who have a history of suspicious transactions, a cloudy background and no obvious way of earning income. They are an inherent risk to your compliance efforts. Know Your Customer (KYC) is a legal requirement and not just a suggestion. If you do not carefully monitor your customer risk, you may face crippling fines.

Geographic Location

The “where” is as important as the “who.” If your clients do business in certain geographical areas, you need to look at their transactions more closely. While some offshore investment is done simply to pay lower taxes legally, many countries qualify as high financial crime areas, particularly high drug trafficking areas. For instance, Haiti has the top ranking on the Basel AML Index partly because of government turmoil and partly because of its drug trade. Other countries and jurisdictions at the top of the index include:

• The Democratic Republic of Congo
• Republic of Congo

If your clients show a high level of financial activity connected to those areas, they may be a serious problem for your organization. Your organization should regularly review this index and update your AML risk assessment methodology accordingly.

How to Conduct an AML Risk Assessment

You now know why you need to build an effective AML risk assessment system and understand the basic categories of risk. But how do you build a model that works for your company? Consider the following necessary steps to conduct a successful AML risk assessment.

Step 1: Get Organized and Hire a Compliance Officer

Your risk assessment process should rely on several basic elements. First, you need a compliance officer who is well-versed in AML regulations and how they apply to your organization. This compliance officer will be central to carrying out your risk management.

You will also need internal controls that include a formal document detailing your risk assessment procedure that has been approved by your board of directors. The risk assessment policy should include what risk level is acceptable for clients and how the financial activity will be monitored.

Step 2: Create AML Procedures

Once your risk assessment policy has been finalized, you will work with the compliance officer to institute procedures to practice customer due diligence , transaction monitoring and geographical location awareness.

Risk profiles are key to an effective policy. You will need to pay particular attention to higher-risk transactions and clients’ business relationships.

Step 3: Repeat the Process Annually

FINRA , a highly regarded, independent, non-government agency, dictates that many clients run independent testing every year, so an annual risk assessment for everyone is probably a good idea. At the very least, you should run one every two years. Doing so will lower your risk of money laundering activity and help you meet regulatory requirements. Your risk scores (low risk, high risk, highest risk) will then be up-to-date and help keep you compliant with AML regulations.

AML Risk Assessment FAQs

What is the role of beneficial ownership in aml risk assessments.

Beneficial ownership refers to identifying the individuals who ultimately own or control a legal entity. Assessing beneficial ownership helps financial institutions understand the potential risks associated with the entity’s ownership structure and determine the appropriate level of due diligence required.

How does ongoing monitoring contribute to AML risk assessments?

Ongoing monitoring involves regularly reviewing customer risk profiles to make sure they are still suitable to do business with. It helps financial institutions identify changes in customer behavior or patterns that may indicate potential money laundering or terrorist financing risks.

How does customer onboarding impact AML risk assessments?

Onboarding refers to the process of accepting and establishing a new customer relationship. A robust onboarding process includes conducting thorough AML risk assessments on new customers to ensure compliance with regulations and mitigate the risk of engaging in illicit activities.

Understanding the Importance of AML Risk Assessments

The necessity of a risk-based approach is clear. A risk assessment helps keep you safe from money-laundering schemes run by financial criminals. Without a plan in place, you risk your company’s reputation and financial health.

Creating an AML compliance program procedure is essential, but it doesn’t have to be difficult. Jumio’s AML Screening solution can quickly help you construct an effective risk assessment methodology that is cost-efficient and easy to implement.

To understand how Jumio can help with AML risk assessment, request information from a specialist today.

Originally published December 30, 2021

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AML KYC Risk Rating Assessment Template, Methodology, Rating Matrix – Download Template

AML Risk Assessment Template and Sample Rating Matrix | Downloadable Template & Raw Data

When onboarding new customers, and throughout the relationship with each customer, financial institutions are required by regulators to perform anti-money laundering (AML) and know-your-customer (KYC) risk assessments to determine a customer’s overall money laundering risk.

Firms must comply with the Bank Secrecy Act and its implementing regulations ( Anti-Money Laundering rules ). The purpose of these rules is to help detect and report suspicious activity including money laundering, terrorist financing, securities fraud, and market manipulation.

When conducting due diligence on new or existing customers, firms normally use a risk assessment template and matrix, similar to the ones presented in the sections below, to determine the overall risk of the client.

Click here to let me know if you have any questions regarding this publication |  Ogbe Airiodion (Senior AML/KYC/Compliance Consultant ).

Risk Rating Calculation Models

Risk assessment templates used by financial institution firms are either in Excel, in a third-party platform, or built into and managed within an internal tool.

These risk assessment templates/matrices have detailed risk scoring logic and formulas that calculate the overall risk score for a client.

Key Assessment Factors

The theory supporting risk assessment tools and templates is based on the concept that a client’s risk AML profile can be measured by applying data-driven and risk-based calculations on risk categories identified by financial experts and the regulatory community. 

To determine a customer’s overall risk rating, a select list of variables is assessed, and each one is rated as low, medium, or high risk. (Some firms only have low and high-risk classification – no medium risk).

Note that risk factors and scores for clients may vary by a financial institution, jurisdiction, and customer segment as different types of customers will have different types of risks associated with them.

For example, a customer’s country of domicile or business registration might be rated low if the customer is domiciled in a low-risk country (e.g., the U.S.) or rated high if the customer is located in a high-risk country (e.g., Colombia or Cuba).

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Sample Risk Assessment Template

Click here to download the below KYC CDD Risk Rating Calculation Table in Excel so you can use it for your purposes. Please note that the below-average score rating is just a simple average.

CDD Risk Score Calculation (Sample)

Applying Weights to Your Risk Calculations

Please note that we have not weighted any of the risk factors higher than the others. It is up to you and your firm (based on your firm’s risk appetite) to determine the weights to apply to each of these risk components.

Firms often assign higher weight factors to a customer’s source of wealth, country of residency, purpose of account, industry, etc.

Below is an example:

Risk Rating Scores – Tables & Raw Data

For risk scores used by financial firms across the industry, see the below tables. Click here to download the raw data: Risk Rating Scores for Assigning CDD Risk Ratings

Risk Rating Scores – Country of Incorporation

Risk Rating Scores – Country of Operation

Risk Rating Scores – Country of Government

Source of Wealth

Click here ( Risk Rating Scores for Assigning CDD Risk Ratings ) to download the full data for all the risk rating factors listed in the below table:

Click here to let me know if you have any questions: Contact Ogbe Airiodion | Sr AML/KYC Compliance Consultant

AdvisoryHQ (AHQ) Disclaimer:

Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms  for details. Also review each firm’s site for the most updated data, rates and info.

Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures .

Written by Owais Ahmed Qureshi

• Customer Risk Assessment

Customer Risk Assessment is a crucial step in ensuring compliance with anti-money laundering (AML) regulations. This article explores the importance of conducting thorough customer risk assessments and how Kyros AML Data Suite empowers AML professionals with advanced tools and capabilities to streamline and enhance this process.

Welcome to our  profound dictionary article on “Customer Risk Assessment.” In the ever-evolving landscape of anti-money laundering (AML) compliance, customer risk assessment plays a pivotal role in identifying and mitigating potential risks associated with clients. This article will provide a comprehensive definition of customer risk assessment, practical examples of its application, relevant statistics and numbers, and an introduction to Kyros AML Data Suite—a powerful AML compliance software designed to enhance customer risk assessment processes. AML professionals will find valuable insights and information to strengthen their compliance efforts and protect their organizations from financial crimes.

Customer Risk Assessment refers to the process of evaluating the level of risk posed by customers or clients in relation to potential involvement in money laundering, terrorist financing, fraud, or other illicit activities. It involves gathering and analyzing relevant information about customers, their activities, and the jurisdictions in which they operate to determine the level of risk they pose to the organization. The assessment helps financial institutions and other regulated entities to categorize customers into risk segments and apply appropriate measures to manage and mitigate identified risks effectively.

Practical Examples

In the world of anti-money laundering (AML) compliance, customer risk assessment plays a crucial role in identifying and managing potential risks associated with clients. This article will delve into practical examples of how customer risk assessment is applied in practice, providing AML professionals with valuable insights to strengthen their risk assessment processes. By understanding real-world scenarios and applying effective risk assessment techniques, AML professionals can proactively mitigate risks and safeguard their organizations from financial crimes.

High-Risk Jurisdiction

One practical example of customer risk assessment is evaluating clients from high-risk jurisdictions. High-risk jurisdictions refer to countries or regions with a higher likelihood of financial crimes, corruption, or weak AML regulations. When conducting customer risk assessments, AML professionals carefully consider the jurisdiction where a customer is located or operates.

This involves gathering relevant information such as the country’s political stability, regulatory framework, and financial transparency. By categorizing customers from high-risk jurisdictions, organizations can apply enhanced due diligence measures, such as additional identity verification, source of funds documentation, and ongoing monitoring. This helps mitigate the potential risks associated with customers operating in jurisdictions that pose a higher AML risk. A robust customer risk assessment process ensures that AML professionals are vigilant in their efforts to identify and address any potential red flags, protecting their organizations from financial crimes and regulatory non-compliance.

Politically Exposed Persons (PEPs)

Another practical example of customer risk assessment is the identification and evaluation of Politically Exposed Persons (PEPs). PEPs are individuals who hold prominent public positions or have close associations with influential figures, such as government officials, heads of state, or senior executives of state-owned enterprises. These individuals may have access to substantial resources and may be more susceptible to corruption, bribery, or money laundering activities. AML professionals conduct thorough customer risk assessments to identify PEPs within their client base and assess the potential risks associated with these relationships. This process involves gathering information on the individual’s political connections, sources of wealth, and business activities.

By identifying PEPs and conducting enhanced due diligence, AML professionals can ensure appropriate risk mitigation measures are in place. This includes ongoing monitoring of PEP relationships, rigorous transaction monitoring, and implementing enhanced controls to prevent the misuse of the financial system for illicit purposes. Customer risk assessment plays a crucial role in safeguarding organizations against the risks associated with PEP relationships and helps maintain regulatory compliance and financial integrity.

Unusual Transaction Patterns

Another practical example of customer risk assessment is the identification and analysis of unusual transaction patterns. AML professionals closely monitor customer transactions to detect any abnormal or suspicious activities that may indicate potential money laundering, terrorist financing, or other illicit financial activities. Unusual transaction patterns can include frequent large cash deposits or withdrawals, structuring transactions to avoid reporting thresholds, rapid movement of funds between accounts, or transactions involving high-risk jurisdictions or individuals.

By analyzing these patterns, AML professionals can identify potential risks and take appropriate actions to mitigate them. This may involve conducting additional due diligence on the customer, filing suspicious activity reports (SARs), or implementing enhanced transaction monitoring measures. Unusual transaction pattern analysis is a critical component of customer risk assessment as it helps identify potential red flags and enables organizations to proactively address potential money laundering or terrorist financing risks.

Complex Business Structures

Complex business structures are another practical example of customer risk assessment in the field of anti-money laundering (AML). A complex business structure refers to the intricate organization and ownership arrangements of companies, often involving multiple layers of subsidiaries, branches, and offshore entities. These structures can be deliberately designed to obscure the true ownership and control of funds, making it challenging to trace the origin of funds and identify potential money laundering activities. AML professionals need to assess the risk associated with customers involved in complex business structures to ensure compliance with regulatory requirements and mitigate the potential for illicit financial activities.

This involves conducting thorough due diligence, including researching the ownership structure, understanding the business activities, and evaluating the transparency and legitimacy of the organization. By analyzing complex business structures, AML professionals can identify potential risks, such as layering or funneling illicit funds through the network of companies and implement appropriate measures to mitigate those risks. This may involve enhanced due diligence procedures, ongoing monitoring, and reporting suspicious activities to the relevant authorities. Assessing the risk associated with complex business structures is crucial for effective customer risk assessment and plays a vital role in preventing money laundering and financial crimes.

Statistics and Relevant Numbers

In the realm of customer risk assessment, understanding the relevant statistics and numbers is essential for AML professionals to make informed decisions and develop effective risk mitigation strategies. While the specific statistics may vary based on jurisdiction and industry, there are some general figures that provide valuable insights into the importance of customer risk assessment. For example, according to a report by the Financial Action Task Force (FATF), customer due diligence failures, including inadequate risk assessments, were identified as one of the primary reasons behind money laundering and terrorist financing cases.

In another study, it was found that financial institutions that implemented robust customer risk assessment frameworks experienced a significant reduction in the number of suspicious transaction reports filed. Additionally, industry reports suggest that around 80% of money laundering cases involve the exploitation of customer accounts and identities. These numbers highlight the critical role of customer risk assessment in the overall AML efforts. By conducting thorough risk assessments, financial institutions can better identify and mitigate potential risks associated with customers, ensuring compliance with regulations, and protecting themselves from financial crimes.

Kyros AML Data Suite: Empowering AML Professionals

Kyros AML Data Suite is a powerful and comprehensive AML compliance software that empowers AML professionals in their fight against financial crimes. This advanced software solution is designed to streamline and enhance various aspects of the AML process, providing a range of benefits to financial institutions and AML teams.

First and foremost, Kyros AML Data Suite offers robust risk assessment capabilities. With its sophisticated algorithms and data analytics, it enables AML professionals to conduct thorough customer risk assessments. The software leverages advanced technology to analyze vast amounts of data, including customer profiles, transaction history, and external data sources, to identify potential high-risk individuals and entities. By providing accurate and comprehensive risk assessments, Kyros AML Data Suite enables AML professionals to make informed decisions and allocate their resources effectively, focusing on the areas that require the most attention.

Furthermore, Kyros AML Data Suite enhances transaction monitoring and suspicious activity detection. The software employs advanced machine learning algorithms to analyze transactional data in real-time, identifying patterns and anomalies that may indicate potential money laundering or other illicit activities. It helps AML professionals in identifying unusual transaction patterns, complex money laundering schemes, and suspicious activities that may go unnoticed through manual monitoring. By automating these processes, Kyros AML Data Suite enables AML professionals to efficiently identify and investigate suspicious transactions, ensuring compliance with regulatory requirements and mitigating financial risks.

Lastly, Kyros AML Data Suite offers comprehensive reporting and audit functionalities. It generates customizable reports and audit trails, allowing AML professionals to demonstrate their compliance efforts to regulators and internal stakeholders. The software provides real-time monitoring and reporting dashboards, enabling AML professionals to track key performance indicators, identify trends, and take proactive measures to strengthen their AML program. With its user-friendly interface and intuitive reporting features, Kyros AML Data Suite simplifies the reporting process and saves valuable time and resources for AML professionals.

In conclusion, customer risk assessment is a critical component of any robust anti-money laundering (AML) program. By conducting thorough assessments, AML professionals can identify and mitigate risks associated with their customers, safeguarding their institutions and the financial system as a whole. The examples discussed in this article, such as high-risk jurisdictions, politically exposed persons (PEPs), unusual transaction patterns, and complex business structures, highlight the importance of evaluating customer risks from various angles.

To effectively carry out customer risk assessments, AML professionals can leverage advanced technologies like the Kyros AML Data Suite. This powerful AML compliance software offers a range of benefits, including accurate risk assessments, enhanced transaction monitoring, and comprehensive reporting functionalities. By harnessing the power of data analytics and machine learning, AML professionals can gain deeper insights into customer behavior and quickly identify potential risks and suspicious activities.

By integrating Kyros AML Data Suite into their AML programs, professionals can strengthen their ability to detect and prevent financial crimes. The software empowers them to stay ahead of evolving regulatory requirements and combat emerging threats effectively. With its user-friendly interface and powerful features, Kyros AML Data Suite provides AML professionals with the tools they need to streamline their processes, allocate resources efficiently, and maintain a robust and effective AML program.

In a constantly evolving landscape of financial crimes, customer risk assessment remains a vital aspect of AML efforts. AML professionals must continue to adapt and leverage innovative technologies to effectively evaluate and mitigate risks associated with their customer base. With the support of advanced solutions like Kyros AML Data Suite, AML professionals can strengthen their AML programs, protect their institutions, and contribute to the global fight against money laundering and other financial crimes. For more information visit kyrosaml.com

• AML Dictionary
• aml software
• AML Solutions
• Anti-Money Laundering
• kyros aml dashboard
• Kyros AML Data Suite
• KyrosAML.com
• Risk management

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From risk to compliance: the five steps to performing an AML risk assessment

In our ever-evolving digital world, technology has changed the way that we make payments, as well as our ability to send money at any time, anywhere in the world.  It has also made it easier for fraudsters to conceal the origins of illegally obtained funds, making them appear to come from a legitimate source.  Indeed, with money laundering schemes costing some 2-5% of the global GDP – up to 30% of that figure originating in the US alone (costing upwards of $300B a year) – it’s pertinent that businesses respond appropriately to the guidance of authoritative and regulatory bodies worldwide. This is where the anti-money laundering (AML) risk assessment comes in.

Let’s take a deep dive into why an AML risk assessment is necessary and the best practices for conducting an effective AML risk assessment as part of a larger AML compliance program.

What is an AML risk assessment?

An AML risk assessment is a key component of any AML tool kit, enabling businesses to measure the likelihood that a customer or client is involved with money laundering or terrorist financing. An AML risk assessment will measure the risk level of each client, performing due diligence to minimize any potential involvement in a money laundering scheme.

Who conducts an AML risk assessment?

Ultimately, an AML risk assessment is a worthwhile process for any organization that conducts financial transactions. Regulators worldwide have made it mandatory for financial institutions under the AML and Counter-Terrorism Financing (CTF) laws and regulations to take the appropriate preventative measures against such financial crimes, or else risk serious penalties and regulatory audits.

How is AML regulated?

To combat AML worldwide, the Financial Action Task Force (FATF), an inter-governmental body that sets standards to guide countries to develop and update their AML and CTF laws, has been created. The FATF includes 39 members and 37 member jurisdictions , as well as the European Commission and the Gulf Cooperation Council.

Specifically (and for example), the USA has the Bank Secrecy Act ( BSA ) and the US Patriot Act , Canada has the Proceeds of Crime (Money Laundering) and Terrorist Financing Act,  Australia has the AML/CTF Act , while Europe is guided by a series of legislative directives, including the most recently released Sixth AML Directive ( 6AMLD ).

The five steps to performing an AML risk assessment

While completing an AML risk assessment is necessary to comply with regulations, understanding the risk level of each client and transaction also protects your business and your reputation.  Below are five steps to follow to ensure compliance and protection.  

1. Document key risk indicators

The first step for conducting an AML risk assessment is to create the appropriate documentation regarding key risk indicators (KRIs) and, in turn, how they relate to your business. This documentation will outline the support for the risk analysis. Remember – document everything, including your thought processes. As information changes and evolves, it helps to have everything cataloged to be sure your processes stay up-to-date and relevant.

Common categories of KRIs that should be documented include:

• Clients/Customers/Business entities

Which type of individuals do you do business with? Are they who they say they are? Some will have a higher risk, such as:

• Politically Exposed Persons (PEPs)
• Non-Resident Aliens
• Professional Service Providers

Be sure to complete a sanction screening to confirm that any individual you are working with is not on any sanction lists. And remember, doing business with PEPs is not necessarily banned, it is simply deemed high risk.

Meanwhile, if your client is a business entity, ask yourself who ultimately controls or benefits from their activities? Be sure to cross-reference any information on file with records kept at the company’s house and other beneficial ownership registers.

• Products/Services  

It’s important to understand and analyze the risks associated with the products and services you offer. For example, the following comes with higher risk:

• Remote deposits
• Probate services
• Gambling services
• Cryptocurrency services
• ATM and cash services
• Foreign correspondent accounts
• Loan portfolios
• Online account opening and access

When providing a higher-risk service, keep a lookout for any red flags associated with your customer’s behavior. For example, ask yourself: Are the services they require consistent with their business rationale?

• Delivery channels

It’s a good idea to remember that some delivery channels can increase money laundering risk, especially if they can disguise the true identity of the client’s activity. Remember to consider whether the service/product will be delivered in person or remotely or provided directly or via an intermediary.

• Geographic location

A core component of any AML risk assessment is identifying the geographic locations that pose a higher risk. For example, do you operate in an area where there are higher rates of drug trafficking? To be thorough, confirm geographic risk through a list from the FATF or other such organizations.

And don’t forget, your customer doesn’t need to be in a foreign land to set off a red flag. If they are in a different city or province, enquire as to why they are coming to you instead of seeking a similar service closer to them, geographically.

• Transactions

Naturally, an AML risk assessment will involve the evaluation of the type of transactions your business engages in. For example, how does the number of international wire transfers compare to domestic ones? Or what is the volume of loan transactions and private ATM customers?

2. Employ dedicated staff

No matter the size of your organization, ensuring adequate staff is employed to dedicate time to compliance is essential when conducting your AML risk assessment.  

3. Identify the inherent risk

Inherent risk represents the exposure your business will have to money laundering risk should you not put any processes in place to mitigate them. This step of identifying the inherent risk builds upon your documentation process in step one.

Once you have identified the inherent risks to your organization, you need to implement controls to reduce them. These can be broken down simply into three categories: weak, adequate and strong.

4. Determine the residual risk

Once you have identified the inherent risk to your organization and, in turn, the effectiveness of the internal control environment you have in place, you can move on to determining the residual risk. This category of risk is defined as the risk that remains once controls have been put in place to mitigate the inherent risk. In other words, what gaps in your controls are present that could enable money laundering?

5. Rate the risk

Best practice involves applying a three-tier rating scale to assess the risk of money laundering or terrorism funding occurring, identified as high risk, moderate risk or low risk. Should the risk be rated high, your mitigation efforts are not effective enough and additional risk management measures should be implemented immediately. Ultimately, the strength of your controls can help determine the risk score. For example, when there are adequate controls in place, risk ratings might reduce from a three to a two.

Furthermore,  best practice dictates one assess the risk at all levels of AML-regulated business. This means that a risk assessment should be conducted at the following levels:

• The transaction level (by whomever is dealing with the transaction)
• The customer/client level (by whomever is dealing with the customer)
• The business level (by the appropriate individual in senior management/legal/compliance)

Finally, when appropriate, it never hurts to go one step further and perform a risk assessment at the sectoral level, the national level and the international level.

Cultivate a culture of compliance

Remember, the AML risk assessment process is an ongoing one. By cultivating a culture of compliance and conducting regular audits of your processes, you can be sure your organization remains aligned with regulatory changes and minimizes the likelihood of risk affecting your business and reputation.

How can you elevate your AML risk assessment?

Unfortunately, despite the risk assessments, controls and strict processes we implement, financial fraud is evolving faster than ever. In fact, in 2022, financial services businesses saw a 79% increase in document fraud compared to the previous year. Given the state of the current economic climate, this situation isn’t predicted to settle anytime soon.

Therefore, in an environment so fraught with fraud, going beyond the regulated assessment requirements is recommended. As we have discussed in previous blogs dedicated to KYC compliance , embracing a digital transformation strategy is a must. What this means is balancing your obligations to AML assessments and compliance with innovative, digital identity verification that can help protect your business against the latest sophisticated fraud trends without impacting the customer experience.

In fact, by enhancing your approach to AML (and KYC) compliance with comprehensive online capabilities like digital identity verification pre-AML risk assessment, you will not only better mitigate sophisticated fraud attacks, such as synthetic identities , but also provide an even more seamless customer experience from the very first touchpoint – account creation.

Want to discover how you can go beyond best practices for conducting your AML risk assessment with digital identity verification? Contact us today.

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• BSA/AML Manual
• BSA/AML Risk Assessment

BSA/AML RISK ASSESSMENT

Objective: Review the bank’s BSA/AML risk assessment process, and determine whether the bank has adequately identified the ML/TF and other illicit financial activity risks within its banking operations.

Examiners must develop an understanding of the bank’s ML/TF and other illicit financial activity risks to evaluate the bank’s BSA/AML compliance program. This is primarily achieved by reviewing the bank’s BSA/AML risk assessment during the scoping and planning process. This section is designed to provide standards for examiners to assess the adequacy of the bank’s BSA/AML risk assessment process.

BSA/AML Risk Assessment Process 

To assure that BSA/AML compliance programs are reasonably designed to meet BSA regulatory requirements, banks structure their compliance programs to be risk-based. While not a specific legal requirement, a well-developed BSA/AML risk assessment assists the bank in identifying ML/TF and other illicit financial activity risks and in developing appropriate internal controls (i.e., policies, procedures, and processes). Understanding its risk profile enables the bank to better apply appropriate risk management processes to the BSA/AML compliance program to mitigate and manage risk and comply with BSA regulatory requirements. The BSA/AML risk assessment process also enables the bank to better identify and mitigate any gaps in controls. The BSA/AML risk assessment should provide a comprehensive analysis of the bank’s ML/TF and other illicit financial activity risks. Documenting the BSA/AML risk assessment in writing is a sound practice to effectively communicate ML/TF and other illicit financial activity risks to appropriate bank personnel. The BSA/AML risk assessment should be provided to all business lines across the bank, the board of directors, management, and appropriate staff. 

The development of the BSA/AML risk assessment generally involves the identification of specific risk categories (e.g., products, services, customers, and geographic locations) unique to the bank, and an analysis of the information identified to better assess the risks within these specific risk categories. 

Identification of Specific Risk Categories

Generally, the first step in developing the risk assessment is to identify the bank’s risk categories. Money laundering, terrorist financing, or other illicit financial activities can occur through any number of different methods or channels. A spectrum of risks may be identifiable even within the same risk category. The bank’s BSA/AML risk assessment process should address the varying degrees of risk associated with its products, services, customers, and geographic locations, as appropriate. Improper identification and assessment of risk can have a cascading effect, creating deficiencies in multiple areas of internal controls and resulting in an overall weakened BSA/AML compliance program.

The identification of risk categories is bank-specific, and a conclusion regarding the risk categories should be based on a consideration of all pertinent information. There are no required risk categories, and the number and detail of these categories vary based on the bank’s size or complexity, and organizational structure. Any single indicator does not necessarily determine the existence of lower or higher risk. 

The subsections within Risks Associated with Money Laundering and Terrorist Financing provide information and discussions on certain products, services, customers, and geographic locations that may present unique challenges and exposures, which banks may need to address through specific policies, procedures, and processes. 

Analysis of Specific Risk Categories

Generally, the second step in developing the BSA/AML risk assessment entails an analysis of the information obtained when identifying specific risk categories. The purpose of this analysis is to assess ML/TF and other illicit financial activity risks in order to develop appropriate internal controls to mitigate overall risk. This step may involve evaluating transaction data pertaining to the bank’s activities relative to products, services, customers, and geographic locations. For example, it may be useful to quantify risk by assessing the number and dollar amount of domestic and international funds transfers, the nature of private banking customers or foreign correspondent accounts, the existence of payable through accounts, and the domestic and international geographic locations where the bank conducts or transacts business. A detailed analysis is important, because the risks associated with the bank’s activities vary. Additionally, the appropriate level and sophistication of the analysis varies by bank. 

The following example illustrates the value of the two-step risk assessment process. The information collected by two banks in the first step reflects that each sends 100 international funds transfers per day. Further analysis by the first bank shows that approximately 90 percent of its funds transfers are recurring well-documented transactions for long-term customers. Further analysis by the second bank shows that 90 percent of its funds transfers are nonrecurring or are processed for noncustomers. While these percentages appear to be the same, the risks may be different. This example illustrates that information collected for purposes of the bank’s customer identification program and developing the customer due diligence customer risk profile is important when conducting a detailed analysis. Refer to the Customer Identification Program , Customer Due Diligence , and Appendix J – Quantity of Risk Matrix sections for more information. 

Various methods and formats may be used to complete the BSA/AML risk assessment; therefore, there is no expectation for a particular method or format. Bank management designs the appropriate method or format and communicates the ML/TF and other illicit financial activity risks to all appropriate parties. When the bank has established an appropriate BSA/AML risk assessment process, and has followed existing policies, procedures, and processes, examiners should not criticize the bank for individual risk or process decisions unless those decisions impact the adequacy of some aspect of the bank’s BSA/AML compliance program or the bank’s compliance with BSA regulatory requirements.

Updating the Risk Assessment

Generally, risk assessments are updated (in whole or in part) to include changes in the bank’s products, services, customers, and geographic locations and to remain an accurate reflection of the bank’s ML/TF and other illicit financial activity risks. For example, the bank may need to update its BSA/AML risk assessment when new products, services, and customer types are introduced or the bank expands through mergers and acquisitions. However, there is no requirement to update the BSA/AML risk assessment on a continuous or specified periodic basis.

Assessing the Bank’s BSA/AML Risk Assessment

When evaluating the BSA/AML risk assessment, examiners should focus on whether the bank has effective processes resulting in a well-developed BSA/AML risk assessment. Examiners should not take any single indicator as determinative of the existence of a lower- or higher-risk profile for the bank. The assessment of risk factors is bank-specific, and a conclusion regarding the risk profile should be based on a consideration of all pertinent information. The bank may determine that some factors should be weighted more heavily than others. For example, the number of funds transfers may be one factor the bank considers when assessing risk. However, to identify and weigh the risks, the bank’s risk assessment process may need to consider other factors associated with those funds transfers, such as whether they are international or domestic, the dollar amounts involved, and the nature of the customer relationships. Regardless of the bank’s approach, sound practice would be to document the factors considered, including any weighting.

Examiners should assess whether the bank has developed a BSA/AML risk assessment that identifies its ML/TF and other illicit financial activity risks. Examiners should also assess whether the bank has considered all products, services, customers, and geographic locations, and whether the bank analyzed the information relative to those risk categories. 

For the purposes of the examination, whenever the bank has not developed a BSA/AML risk assessment, or the BSA/AML risk assessment is inadequate, examiners must develop a BSA/AML risk assessment for the bank based on available information. An examiner-developed BSA/AML risk assessment generally is not as comprehensive as one developed by the bank. Examiners should have a general understanding of the bank’s ML/TF and other illicit financial activity risks from the examination scoping and planning process. This information should be evaluated using the two-step approach detailed in the BSA/AML Risk Assessment Process subsection above. Examiners may also refer to Appendix J - Quantity of Risk Matrix when completing this evaluation.

Developing a BSA/AML Compliance Program Based on the BSA/AML Risk Assessment

The bank structures its BSA/AML compliance program to address its risk profile, based on the bank’s assessment of risks, as well as to comply with BSA regulatory requirements. Specifically, the bank should develop appropriate policies, procedures, and processes to monitor and control its ML/TF and other illicit financial activity risks. For example, the bank’s monitoring system to identify, research, and report suspicious activity should be risk-based to incorporate any necessary additional screening for higher-risk products, services, customers, and geographic locations as identified by the bank’s BSA/AML risk assessment. Independent testing (audit) should review the bank’s BSA/AML risk assessment, including how it is used to develop the BSA/AML compliance program. Refer to Appendix I - Risk Assessment Link to the BSA/AML Compliance Program for a chart depicting the expected link of the BSA/AML risk assessment to the BSA/AML compliance program.

Consolidated BSA/AML Risk Assessment

Banks that choose to implement a consolidated or partially consolidated BSA/AML compliance program should assess risk within business lines and across activities and legal entities. Consolidating ML/TF and other illicit financial activity risks for larger or more complex banking organizations may assist senior management and the board of directors in identifying, understanding, and appropriately mitigating risks within and across the banking organization. To understand ML/TF and other illicit financial activity risk exposures, the banking organization should communicate across all business lines, activities, and legal entities. Identifying a vulnerability in one aspect of the banking organization may indicate vulnerabilities elsewhere. Refer to the BSA/AML Compliance Program Structures section for more information.

Table of Contents

• Introduction
• Scoping and Planning
• Assessing the BSA/AML Compliance Program
• Developing Conclusions and Finalizing the Exam
• Assessing Compliance with BSA Regulatory Requirements
• Office of Foreign Assets Control
• Program Structures
• Risks Associated with Money Laundering and Terrorist Financing

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Unveiling AML Risk Assessment: A Comprehensive Guide for Compliance Professionals

Understanding AML Risk Assessment

In the realm of compliance and anti-money laundering (AML), conducting a thorough and effective AML risk assessment is crucial to safeguarding financial institutions and the larger financial ecosystem against money laundering threats. AML risk assessment involves a comprehensive evaluation of potential risks, vulnerabilities, and threats faced by an organization.

Introduction to AML Risk Assessment

AML risk assessment is a systematic process that allows organizations to identify, assess, and mitigate the risks associated with money laundering and terrorist financing. It forms the foundation for developing an effective AML compliance program. By understanding the specific risks faced by an organization, compliance professionals can tailor their efforts and allocate resources accordingly to mitigate those risks.

The core components of AML risk assessment include risk identification, risk evaluation, risk mitigation, and documentation and reporting. These pillars are essential in identifying and analyzing risks, developing risk mitigation strategies, and ensuring compliance with regulatory obligations. A well-structured and comprehensive AML risk assessment helps financial institutions to allocate resources efficiently, enhance regulatory compliance, and reduce financial crime risks ( FlagRight ).

Importance of AML Risk Assessment

The importance of AML risk assessment cannot be overstated. It enables organizations to proactively identify and understand the money laundering and terrorist financing risks they face. By conducting a comprehensive assessment, compliance professionals can develop appropriate risk mitigation strategies and implement adequate controls. A thorough understanding of risks allows organizations to prioritize their efforts and allocate resources effectively to combat financial crime.

AML risk assessment also plays a vital role in complying with regulatory requirements. Regulatory bodies worldwide, such as the Financial Action Task Force (FATF) and Basel Committee on Banking Supervision (BCBS), emphasize the need for financial institutions to conduct regular and robust risk assessments. These assessments assist in identifying and managing ML/TF (money laundering/terrorist financing) risks, ensuring compliance with anti-money laundering legislation and international AML regulations.

Moreover, AML risk assessments aid in the identification and ongoing monitoring of high-risk customers, enabling financial institutions to implement enhanced due diligence measures. By understanding customer risk profiles through processes like customer due diligence (CDD) and ongoing monitoring of customer activity, organizations can better detect and prevent potential money laundering activities. This helps maintain the integrity of the financial system and protect institutions from reputational and regulatory risks.

In summary, AML risk assessment is a critical tool for compliance professionals. It provides insights into the specific risks faced by organizations, aids in the development of risk mitigation strategies, ensures compliance with regulatory requirements, and enhances the overall effectiveness of AML programs. By conducting regular and comprehensive risk assessments, organizations can stay ahead of emerging threats and protect themselves from financial and reputational consequences associated with ineffective AML risk management.

Key Components of AML Risk Assessment

AML risk assessment is a critical process that enables financial institutions to identify, evaluate, and mitigate the risks associated with money laundering and terrorist financing. It consists of several key components that work together to build a robust framework for compliance. These components include risk identification, risk evaluation, risk mitigation, and documentation and reporting.

Risk Identification

Risk identification is the initial step in AML risk assessment. It involves identifying and understanding the inherent risks associated with the institution’s products, services, customers, and geographic locations. This process requires a comprehensive analysis of various factors, such as transaction volumes, customer profiles, and the nature of the institution’s business activities.

The goal of risk identification is to identify potential vulnerabilities and areas of higher risk. This enables institutions to allocate resources effectively and implement targeted measures to mitigate those risks. Regular updates to the risk identification process are essential to keep pace with changes in the institution’s activities, customer base, and regulatory landscape.

Risk Evaluation

Once the risks have been identified, the next step is to evaluate their significance and potential impact on the institution. Risk evaluation involves assessing the likelihood and potential harm of money laundering or terrorist financing occurring within the institution’s operations. This assessment helps prioritize risks and allocate resources accordingly.

Evaluation criteria may include transactional patterns, customer behavior, and the institution’s exposure to high-risk jurisdictions. By evaluating the risks, institutions can determine the level of attention and control measures required for specific areas of their operations. Effective risk evaluation enables institutions to focus their efforts on areas of higher risk and address them appropriately.

Risk Mitigation

Risk mitigation involves the implementation of measures to reduce or manage identified risks. This can include the development and implementation of policies, procedures, and internal controls aimed at preventing and detecting money laundering and terrorist financing activities. Risk mitigation measures should be commensurate with the level of risk identified during the evaluation process.

Examples of risk mitigation measures include customer due diligence (CDD), transaction monitoring systems, enhanced internal controls, and staff training programs. These measures help to strengthen the institution’s ability to detect suspicious activities and report them in a timely manner. Regular reviews and updates of risk mitigation measures are necessary to ensure their ongoing effectiveness.

Documentation and Reporting

Documentation and reporting are crucial components of AML risk assessment. Institutions must maintain comprehensive records of their risk assessment processes, including the identified risks, evaluation outcomes, and mitigation measures implemented. Proper documentation serves as evidence of the institution’s compliance efforts and helps demonstrate accountability during audits and regulatory inspections.

In addition, institutions have reporting obligations to relevant authorities. These reporting requirements vary depending on jurisdiction and may include suspicious activity reports (SARs) or other regulatory filings. Accurate and timely reporting is essential for effective collaboration between financial institutions and regulatory bodies in combating money laundering and terrorist financing.

By incorporating these key components into their AML risk assessment processes, financial institutions can better understand and manage the risks associated with money laundering and terrorist financing. Regular updates and continuous improvement of these components ensure that institutions stay vigilant and compliant in an ever-evolving regulatory landscape.

Technology and AML Risk Assessment

As the fight against money laundering intensifies, technology plays a crucial role in enhancing the accuracy, efficiency, and effectiveness of AML risk assessment . Modern AML compliance practices have shifted towards centralized, automated monitoring using advanced algorithms, artificial intelligence (AI), and machine learning (ML) techniques to detect unusual transaction patterns in real-time. This shift enables financial institutions to predict, prevent, and respond instantly to money laundering activities ( FlagRight ).

Role of Technology in AML Risk Assessment

Technology has become a vital ally in the fight against money laundering, empowering compliance professionals to strengthen their AML risk assessment frameworks. The key benefits of leveraging technology in AML risk assessment include:

Real-time Transaction Monitoring: Technology enables financial institutions to monitor transactions in real-time, allowing them to detect suspicious activities promptly. Advanced analytics and AI algorithms can identify patterns and anomalies, raising alerts for further investigation.

Automated Customer Risk Assessment: With the help of technology, financial institutions can automate customer risk assessments. By analyzing customer data, such as transaction history, account activity, and relationships, AI-powered systems can determine the risk level associated with each customer. This enables compliance professionals to focus their efforts on high-risk individuals or entities.

KYB & Customer ID Verification: Technology facilitates Know Your Customer (KYC) processes by automating customer identity verification. Through the use of electronic identification and verification tools, financial institutions can efficiently verify customer identities, ensuring compliance with KYC regulations .

Sanctions Screening: Technology enables financial institutions to screen customers against global watchlists and sanction databases. Automated sanction screening tools can quickly identify individuals or entities with connections to illicit activities or sanctioned countries.

Integration & Centralization: Technology allows for the integration and centralization of various data sources within financial institutions. This consolidation of data enhances the AML risk assessment process by providing a holistic view of customer activity and facilitating comprehensive analysis.

Tools and Technologies for AML Risk Assessment

To enhance AML risk assessment capabilities, financial institutions utilize a range of tools and technologies. These include:

AML Compliance Software: AML compliance software provides a comprehensive solution for managing AML risks. These software solutions often include features such as transaction monitoring, customer due diligence, watchlist screening, and reporting functionalities. By leveraging such software, compliance professionals can streamline their AML risk assessment processes and ensure compliance with regulatory requirements.

Data Analytics: Data analytics tools enable financial institutions to analyze large volumes of data to identify patterns, anomalies, and potential risks. By leveraging AI and ML algorithms, compliance professionals can gain valuable insights from transactional data, customer information, and other relevant sources.

Machine Learning and Artificial Intelligence: Machine learning and AI technologies play a crucial role in AML risk assessment. These technologies can analyze vast amounts of data, identify patterns, and detect suspicious activities with greater accuracy. They can also adapt and learn from new data, continuously improving the effectiveness of risk assessment models.

Regulatory Technology (RegTech): RegTech solutions leverage technology to automate and streamline regulatory compliance processes. These solutions often incorporate AI, ML, and data analytics to enhance AML risk assessment capabilities, simplify reporting, and ensure compliance with anti-money laundering legislation .

By embracing technology and leveraging cutting-edge tools and technologies, compliance professionals can strengthen their AML risk assessment frameworks, enhance detection capabilities, and proactively combat money laundering activities. However, it’s crucial to regularly fine-tune and update these technologies to ensure their ongoing effectiveness in assessing financial crime risk ( FinScan ). The future of AML risk assessment lies in advancements in technology, such as AI, ML, and data analytics, as well as the evolving landscape of financial crimes ( International Banker ).

Customer Risk Profiling in AML Risk Assessment

A crucial aspect of conducting an effective AML risk assessment is understanding the risk profile of customers. Customer risk profiling involves assessing the level of risk associated with each customer and tailoring due diligence measures accordingly. Two key components of customer risk profiling in AML risk assessment are customer due diligence (CDD) and ongoing monitoring of customer activity.

Customer Due Diligence (CDD)

Customer due diligence (CDD) is a fundamental step in the AML risk assessment process. It involves verifying the identity of customers, understanding the nature of their business relationships, and assessing the potential money laundering risks associated with them. CDD measures help financial institutions and other regulated entities to establish the true identity of their customers, ensuring they are not unknowingly involved in illicit activities.

CDD typically includes gathering and verifying information such as customer identification documents, proof of address, and beneficial ownership information. Financial institutions and regulated entities should adhere to applicable know your customer (KYC) regulations to ensure compliance with AML laws and regulations.

The depth of CDD measures may vary based on the risk level associated with the customer. Higher-risk customers, such as those in politically exposed positions or operating in high-risk jurisdictions, may require enhanced due diligence measures. These measures include gathering additional information about the customer’s source of funds, business activities, and conducting more thorough background checks.

Ongoing Monitoring of Customer Activity

Once CDD measures are completed, it is essential to continually monitor customer activity as part of the AML risk assessment process. Ongoing monitoring enables the detection of any suspicious activities that may indicate potential money laundering risks. By monitoring customer transactions, behavior, and patterns, financial institutions and regulated entities can identify and report any unusual or suspicious activities to the appropriate authorities.

Ongoing monitoring involves analyzing customer transactions against established risk profiles and predefined parameters. This can be done using AML compliance software and tools that leverage data analytics and transaction monitoring techniques. These tools help identify and flag any unusual or high-risk transactions, enabling timely investigation and reporting.

Regular reviews of customer relationships are also important to ensure that the risk profile remains up to date. Changes in a customer’s behavior or business activities may warrant a reevaluation of their risk level and the implementation of additional due diligence measures as necessary.

By conducting thorough customer due diligence and implementing ongoing monitoring practices, financial institutions and regulated entities can effectively assess the AML risks associated with their customers. This enables them to comply with anti-money laundering legislation and fulfill their obligations to prevent money laundering and terrorist financing.

To learn more about AML risk assessment and related topics, consider exploring our articles on aml compliance training , aml enforcement actions , international aml regulations , global aml standards , aml reporting obligations , and aml compliance audits .

Geographical Considerations in AML Risk Assessment

When conducting an AML risk assessment, it is crucial to assess the geographical risks associated with customers and their financial transactions. This involves evaluating the jurisdictions and regulatory oversight in which these activities occur, as well as considering any known risks related to money laundering activities and sanctions.

Assessing Geographical Risks

Geographical risk assessment is an integral part of the overall AML risk assessment process. It involves analyzing the locations where customers and their financial transactions are based, taking into account the specific risks associated with those jurisdictions. Some factors to consider include the level of regulatory oversight, the presence of money laundering activities, and the effectiveness of anti-money laundering systems and controls in those regions.

By assessing geographical risks, compliance professionals can gain a better understanding of the potential vulnerabilities and exposure to money laundering and other illicit financial activities. This knowledge allows them to develop risk-based strategies and implement appropriate measures to mitigate these risks effectively.

Jurisdictions and Regulatory Oversight

When evaluating geographical risks, it is essential to consider the jurisdictions involved and the level of regulatory oversight in those areas. Some countries or regions may have a higher risk profile due to factors such as weak or inadequate anti-money laundering regulations, limited enforcement capabilities, or a history of financial crime incidents.

Jurisdictions with known deficiencies in their anti-money laundering frameworks or a lack of effective regulatory oversight may pose higher risks for financial institutions. These risks can include an increased likelihood of money laundering, corruption, terrorist financing, or other illicit activities.

By understanding the regulatory landscape and risk factors associated with different jurisdictions, compliance professionals can tailor their anti-money laundering measures and due diligence processes accordingly. This helps ensure that they are adequately addressing the unique risks associated with specific geographical areas.

To stay updated on international AML regulations and best practices, compliance professionals should regularly refer to reliable sources, attend industry conferences, and participate in AML compliance training programs. Additionally, leveraging advanced AML compliance software can assist in monitoring and managing geographical risks effectively.

By incorporating geographical considerations into the AML risk assessment process, compliance professionals can gain a comprehensive understanding of the risks associated with their customers and transactions. This enables them to implement targeted risk mitigation measures, enhance due diligence procedures, and ensure compliance with international AML regulations and AML reporting obligations .

Risk-Based Approach in AML Risk Assessment

When it comes to conducting an effective AML risk assessment, a risk-based approach is crucial. This approach involves tailoring the depth of due diligence based on the level of risk associated with a particular customer. By focusing resources and attention on higher-risk customers, compliance professionals can ensure a more targeted and efficient AML risk assessment process.

Tailoring Due Diligence based on Risk

A risk-based approach in AML risk assessment recognizes that not all customers pose the same level of risk. It involves categorizing customers into different risk categories based on factors such as their location, business activities, transaction patterns, and reputation. This enables compliance professionals to allocate resources more effectively and prioritize their efforts where they are most needed.

Higher-risk customers, such as those operating in high-risk jurisdictions or engaged in complex financial transactions, require more extensive due diligence measures. This may include enhanced Know Your Customer (KYC) procedures, continuous monitoring of customer activity, and additional documentation requirements. On the other hand, lower-risk customers may undergo more streamlined due diligence processes that focus on verifying their identities and conducting basic checks.

By tailoring the level of due diligence based on risk, compliance professionals can strike a balance between regulatory requirements and operational efficiency. This approach ensures that the necessary measures are in place to detect and prevent money laundering and other financial crimes, while avoiding unnecessary burden on customers and resources.

High-Risk vs. Low-Risk Customers

Differentiating between high-risk and low-risk customers is a critical aspect of a risk-based approach in AML risk assessment. The determination of risk levels should be based on a comprehensive analysis of various risk indicators, taking into account factors such as the customer’s industry, geographic location, transaction history, and reputation.

High-risk customers typically fall into categories that pose a greater potential for money laundering or terrorist financing. These may include politically exposed persons (PEPs), correspondent banking relationships, money service businesses (MSBs), or customers from jurisdictions with weak AML regulations. For these customers, additional due diligence measures and ongoing monitoring are essential to mitigate the higher level of risk they present.

On the other hand, low-risk customers are those who present a lower likelihood of involvement in illicit activities. These may include individuals with a long-standing relationship with the financial institution, customers from low-risk jurisdictions, or those engaged in low-value, routine transactions. While these customers may undergo a less rigorous due diligence process, ongoing monitoring should still be in place to detect any changes in their risk profile.

By adopting a risk-based approach, compliance professionals can allocate resources based on the level of risk each customer represents. This ensures that AML efforts are focused where they are most needed, enabling financial institutions to efficiently manage the risks associated with money laundering and other financial crimes.

For more information on AML risk assessment, as well as other aspects of AML compliance, explore our articles on international AML regulations , AML reporting obligations , and AML compliance audits .

Importance of Regular AML Risk Assessments

Regular AML risk assessments are crucial for organizations to ensure the ongoing effectiveness of their anti-money laundering (AML) processes and to stay compliant with regulatory requirements. These assessments play a vital role in adapting to changes in the business environment and meeting the evolving challenges posed by financial crimes.

Adapting to Changes in the Business Environment

The business landscape is constantly evolving, and this includes the methods used by criminals to launder money. By conducting regular AML risk assessments, organizations can stay ahead of these changes and adapt their risk management strategies accordingly. These assessments help identify emerging risks, such as new products, services, customer types, or geographic locations that may present a higher risk of money laundering or terrorist financing. Updating the risk assessment to include these changes allows organizations to tailor their AML measures to address specific risks and effectively mitigate them ( Financial Crime Academy ).

Compliance with Regulatory Requirements

AML risk assessments are an essential component of regulatory compliance. Regulatory authorities require organizations to conduct these assessments to demonstrate their commitment to preventing money laundering and terrorist financing. By regularly reviewing and updating their risk assessments, organizations can ensure that their AML programs align with the latest regulations and guidelines. This helps organizations avoid penalties, fines, and reputational damage associated with non-compliance ( BSA/AML Manual ).

Moreover, a well-structured AML risk assessment helps financial institutions allocate their resources efficiently and prioritize their efforts to address the highest ML/TF risks. By focusing on areas of higher risk, organizations can enhance their regulatory compliance and minimize exposure to financial crime risks ( Tookitaki ).

Regular AML risk assessments provide organizations with the opportunity to assess and update their risk appetite. Senior management can communicate a clear risk appetite to staff at all levels, enabling them to understand the ML/TF risks the organization is willing to accept to achieve its strategic objectives. This helps in aligning AML risk management strategies with the organization’s overall risk tolerance and business goals ( BCBS ).

In summary, conducting regular AML risk assessments is essential for organizations to adapt to changes in the business environment, meet regulatory requirements, allocate resources effectively, and reduce financial crime risks. By staying proactive and up-to-date with their risk assessments, organizations can enhance their AML programs and safeguard themselves against the consequences of ineffective risk management.

Documentation in AML Risk Assessment

Proper documentation is a critical aspect of conducting an effective AML risk assessment process. It serves as a record of the assessment’s processes, findings, and decisions. Clear and comprehensive documentation is essential for demonstrating compliance with AML regulations , establishing audit trails, and supporting investigations into suspicious activities.

Importance of Proper Documentation

Clear documentation plays a vital role in AML risk assessment. It provides a documented trail of the steps taken during the assessment process, including risk identification, evaluation, and mitigation. By documenting these steps, compliance professionals can showcase their adherence to AML regulations and demonstrate their commitment to combating financial crimes.

Proper documentation also assists in ensuring consistency and transparency within organizations. It helps compliance professionals communicate their findings and recommendations to relevant stakeholders, such as senior management, regulators, and auditors. By having well-documented AML risk assessment processes, organizations can maintain a clear and structured approach to managing AML risks.

Demonstration of Compliance and Audit Trails

Documentation in AML risk assessment provides a means to demonstrate compliance with regulatory requirements. Regulators and auditors often request evidence of the risk assessment process and the decisions made based on the identified risks. Proper documentation allows compliance professionals to provide a comprehensive overview of the risk assessment methodology, data sources utilized, risk ratings assigned, and the rationale behind risk mitigation strategies.

In addition, documentation facilitates the creation of audit trails. Audit trails are essential for tracking the history of AML risk assessments, enabling organizations to identify any gaps or weaknesses in their processes. Audit trails also support internal and external audits, helping organizations assess the effectiveness of their AML risk assessment frameworks and identify areas for improvement.

To maintain effective documentation, organizations should establish clear guidelines and procedures for documenting the AML risk assessment process. This includes defining the required information to be captured, the format of the documentation, and the responsible individuals for maintaining and updating the documentation. Utilizing AML compliance software can also streamline the documentation process and ensure consistency across different assessments.

By prioritizing proper documentation, organizations can enhance their AML risk assessment practices, improve transparency, and meet regulatory obligations. It provides a strong foundation for demonstrating compliance, maintaining audit trails, and continuously improving AML risk management frameworks.

Financial Institutions and AML Risk Assessment

Financial institutions play a crucial role in combating money laundering and terrorist financing by conducting thorough AML risk assessments. This section focuses on the specific considerations for AML risk assessment in banks and highlights the guidelines provided by the Basel Committee on Banking Supervision (BCBS) for AML/CFT risk management.

AML Risk Assessment in Banks

Banks are at the forefront of AML efforts due to their involvement in financial transactions and their ability to detect and prevent illicit activities. AML risk assessment in banks involves identifying, evaluating, and mitigating the risks associated with money laundering and terrorist financing. It is a comprehensive process that requires a deep understanding of the bank’s customers, products, services, and geographical reach.

To effectively assess AML risks, banks are expected to implement a risk-based approach. This approach involves tailoring due diligence measures based on the level of risk posed by each customer. By categorizing customers into high-risk and low-risk segments, banks can allocate resources more efficiently and focus their efforts on the areas that pose the greatest risk.

The AML risk assessment process in banks is guided by international standards and regulatory requirements, such as know your customer (KYC) regulations and anti-money laundering legislation . Banks are required to have robust policies, procedures, and controls in place to ensure compliance with these standards and to protect themselves from financial and reputational risks.

Basel Committee Guidelines for AML/CFT Risk Management

The Basel Committee on Banking Supervision (BCBS) has provided guidelines for AML/CFT risk management in financial institutions, including banks. In December 2020, the BCBS released a document outlining principles for the sound management of AML/CFT risks and setting expectations for risk identification, assessment, monitoring, and management in banks ( BCBS ).

According to the BCBS guidelines, banks are expected to:

• Identify, assess, monitor, and manage money laundering (ML) and terrorist financing (TF) risks comprehensively at a group-wide level and on a continuous basis.
• Take appropriate measures to effectively mitigate these risks.
• Communicate a clear “risk appetite” to staff at all levels, enabling them to understand the ML/TF risks the bank is willing to accept to achieve its strategic objectives.
• Implement a comprehensive and coordinated AML/CFT risk assessment process, considering all relevant factors at both the country and customer levels.
• Ensure that the AML/CFT risk assessment process is subject to appropriate governance and oversight, including independent review and validation.

By following these guidelines, banks can enhance their ability to detect and prevent money laundering and terrorist financing activities. Effective AML risk assessment in banks is vital for maintaining regulatory compliance, safeguarding the integrity of the financial system, and protecting the institution from AML fines and penalties .

The BCBS guidelines serve as a valuable resource for banks seeking to strengthen their AML risk management practices and contribute to the global fight against financial crimes. They emphasize the importance of a comprehensive, risk-based approach and the need for ongoing monitoring and adaptation to changing AML risks.

In the ever-evolving landscape of financial crimes, financial institutions must remain diligent in their AML risk assessment efforts and continuously strive for improvement. Through the implementation of sound risk management practices and the use of advanced technologies, banks can stay ahead of emerging threats and contribute to a safer and more secure financial environment.

Challenges in AML Risk Assessment

Effective AML risk assessment is crucial for organizations to identify and mitigate potential money laundering risks. However, this process is not without its challenges. Two key challenges in AML risk assessment are developing a structured framework and ensuring continuous improvement and innovation.

Developing a Structured Framework

Developing a structured framework for AML risk assessment is essential to ensure consistency and compliance with regulatory requirements. This framework serves as a roadmap for organizations to identify, evaluate, and address money laundering risks systematically.

A comprehensive AML risk assessment framework should include:

• Risk identification : Identifying and documenting the inherent risks associated with the organization’s customers, products, services, and geographic locations.
• Risk evaluation : Assessing the likelihood and impact of identified risks to determine their significance and prioritize mitigation efforts.
• Risk mitigation : Implementing controls, policies, and procedures to manage, monitor, and mitigate the identified risks effectively.
• Documentation and reporting : Maintaining comprehensive documentation of the risk assessment process, findings, and actions taken, as well as reporting to relevant stakeholders and regulatory authorities.

By establishing a structured framework, organizations can ensure consistency in their approach to AML risk assessment and enhance their ability to detect and prevent money laundering activities.

Continuous Improvement and Innovation

The landscape of financial crimes and money laundering techniques is constantly evolving. To keep pace with these changes, organizations must prioritize continuous improvement and innovation in their AML risk assessment strategies.

Regular revisions of the risk assessment framework and methodologies are necessary to adapt to emerging risks and regulatory developments. This includes staying up-to-date with international AML regulations and global AML standards .

Continuous improvement also involves leveraging advancements in technology and adopting innovative solutions. AML compliance software, for example, can streamline the risk assessment process, enhance data analysis capabilities, and improve the efficiency of compliance efforts ( AML compliance software ). Organizations should also invest in AML compliance training to keep employees informed about the latest trends and techniques in money laundering.

By embracing continuous improvement and innovation, organizations can strengthen their AML risk assessment practices, adapt to the changing landscape of financial crimes, and enhance their ability to combat money laundering effectively.

Navigating the challenges of developing a structured framework and ensuring continuous improvement and innovation is crucial for organizations aiming to strengthen their AML risk assessment capabilities. By addressing these challenges head-on, organizations can mitigate the risks associated with money laundering and maintain compliance with regulatory requirements.

Consequences of Ineffective AML Risk Assessment

When it comes to anti-money laundering (AML) risk assessment, the consequences of an ineffective approach can be significant. Financial institutions and businesses that fail to adequately assess and mitigate AML risks may face both financial and reputational consequences.

Financial and Reputational Consequences

In recent years, the risks associated with AML programs have continued to rise steadily. Regulatory bodies have imposed substantial fines and penalties on financial institutions for failures in complying with AML regulations. In 2020 alone, over $8.14 billion in penalties were imposed on financial institutions for sanctions failures, highlighting the importance of effective AML risk assessment and compliance measures ( International Banker ).

AML fines have seen a significant increase, with over $706 million in fines issued by regulators worldwide for sanctions-related non-compliance in 2020. This trend underscores the critical need for organizations to avoid breaching AML regulations and incurring penalties ( International Banker ).

In addition to financial penalties, the reputational damage caused by non-compliance with AML regulations can be severe. Alleged breaches of AML regulations have resulted in increasingly large fines against companies globally, affecting their standing in the market and eroding the trust of customers and stakeholders ( LexisNexis ).

To avoid these consequences, organizations must prioritize conducting thorough AML risk assessments and implementing robust compliance measures. This involves developing and maintaining effective AML policies, conducting regular audits, and providing ongoing AML compliance training to staff members ( lexisNexis ). By doing so, businesses can mitigate the risk of financial and reputational damage while demonstrating their commitment to combating money laundering and protecting the integrity of the financial system.

It’s crucial for organizations to stay up to date with international AML regulations and global AML standards to ensure compliance and avoid the severe consequences associated with ineffective AML risk assessment.

To further enhance AML compliance efforts, companies can leverage advanced AML compliance software and regularly conduct AML compliance audits to identify any gaps or areas for improvement. By taking a proactive approach to AML risk assessment and compliance, organizations can safeguard their financial interests, protect their reputation, and contribute to the overall integrity of the financial system.

Future of AML Risk Assessment

As the landscape of financial crimes continues to evolve, the future of AML risk assessment is shaped by advancements in technology and the need for continuous improvement and innovation. Financial institutions and regulatory bodies are recognizing the importance of staying ahead of money laundering activities and adapting to the ever-changing strategies employed by criminals.

Advancements in Technology

Recent advancements in technology, such as artificial intelligence and machine learning, have become essential tools for enhancing AML risk assessment capabilities. These technologies enable financial institutions to detect and prevent money laundering activities more effectively by analyzing vast amounts of data in real-time ( International Banker ). By utilizing data analytics, transaction monitoring, and automated customer risk assessment, financial institutions can identify, assess, monitor, and control AML risks more efficiently and accurately ( Tookitaki ).

Technology also plays a crucial role in streamlining compliance processes. Tools such as real-time transaction monitoring, automated customer risk assessment, KYB (Know Your Business) and customer ID verification, sanctions screening, and integration and centralization of data enhance accuracy, efficiency, and the proactive defense against money laundering ( FlagRight ). These advancements enable financial institutions to adopt centralized, automated monitoring systems using advanced algorithms, artificial intelligence, and machine learning. This empowers them to detect unusual transaction patterns in real-time, predict and prevent money laundering activities, and respond instantly to emerging risks.

Evolving Landscape of Financial Crimes

The rapid evolution of financial crimes and money laundering techniques necessitates continuous improvement and innovation in AML risk assessment strategies. Criminals are constantly finding new ways to exploit vulnerabilities, making it imperative for compliance professionals to stay informed and adapt their risk assessment approaches accordingly.

Financial institutions must proactively address emerging risks associated with new payment methods, digital currencies, and evolving technologies. They should also keep a close eye on global AML regulations and standards to ensure compliance with international best practices ( International Banker ). AML risk assessment frameworks should be regularly reviewed and updated to address the latest trends in money laundering and to incorporate technological advancements.

By embracing advancements in technology and continuously improving risk assessment strategies, financial institutions can enhance their ability to combat money laundering and protect the integrity of the global financial system. The future of AML risk assessment lies in the seamless integration of technology, data analytics, and human expertise to stay one step ahead of financial criminals. Compliance professionals must remain vigilant, adapt to changes, and leverage technological tools to mitigate risks effectively and maintain regulatory compliance.

Staying Ahead of the Game: Nailing CDD Regulations in AML Compliance

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Staying Ahead of Financial Crime: Adhering to FATF Recommendations for Financial Institutions

KYC Process Step 3: Organize

Consequences For Non-Compliance

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* membership suspended on 24 February 2023 

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• Asia/Pacific Group on Money Laundering (APG)
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Publication details

As amended June 2023.

The FATF conducts mutual evaluations of its members’ levels of implementation of the FATF Recommendations on an ongoing basis. These are peer reviews, where members from different countries assess another country. The  FATF Methodology for assessing compliance with the FATF Recommendations and the effectiveness of AML/CFT systems sets out the evaluation process.  

Assessments focus on two areas, effectiveness and technical compliance .  

• The emphasis of any assessment is on effectiveness .  A country must demonstrate that, in the context of the risks it is exposed to, it has an effective framework to protect the financial system from abuse.   The assessment team will look at 11 key areas, or immediate outcomes, to determine the level of effectiveness of a country's efforts.  
• The assessment also looks at whether a country has met all the technical requirements of each of the 40 FATF Recommendations in its laws, regulations and other legal instruments to combat money laundering, and the financing of terrorism and proliferation.  

A mutual evaluation report provides an in-depth description and analysis of a country’s system for preventing criminal abuse of the financial system as well as focused recommendations to the country to further strengthen its system.  

The Methodology will be used by the FATF, the FATF-Style Regional Bodies (FSRBs) and other assessment bodies such as the IMF and the World Bank.   The Methodology was adopted on 22 February 2013, and regularly updated;  (see also ' Information on updates made to the FATF Methodology ').

Methodology 2013

Related content: .

• Consolidated Processes and Procedures for Mutual Evaluations and Follow-Up Universal Procedures The set of core elements that apply to all anti-money laundering and counter-terrorist financing assessments, in accordance with the FATF 2013 Methodology. These procedures were last revised in September 2022.
• Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations This document sets out the procedures that are the basis for the fourth round of mutual evaluations which involves two inter-related components for technical compliance and effectiveness. Adopted in 2013, these Procedures were last amended in February 2023.
• Mutual Evaluations What is involved in a mutual evaluation? A simple explanation of the various stages and parties involved in the assessment of the effectiveness of a country's measures to combat money laundering and the financing of terrorism and proliferation.
• Consolidated assessment ratings An up-to-date overview of the ratings on both effectiveness and technical compliance for all countries assessed against the 2012 FATF Recommendations and using the 2013 Assessment Methodology.

An effective system to combat money laundering and terrorist financing

What is the objective of anti-money laundering, counter terrorist and counter proliferation financing efforts?  Find out more about the various components that governments must implement, and that the FATF will assess against.

Information on updates to the Methodology

Translations.

The following are unofficial, working translations of the FATF Methodology, that are provided for information only. 

Anti-money laundering and countering the financing of terrorism at international level

The Commission is mandated to identify high-risk third countries having strategic deficiencies in their regime on anti-money laundering and countering the financing of terrorism.

What the EU is doing and why

To effectively combat the global circulation of dirty money, international efforts are needed. The Commission is actively working with international partners for instance through the Financial Action Task Force (FATF) , the global standard setter on anti-money laundering and counter terrorism financing. The FATF notably identifies jurisdictions having strategic deficiencies in their regimes to counter money laundering and terrorist financing. The EU’s listing takes into account the recommendations provided by FATF.

The identification of high-risk counties is required in order to protect the EU financial system and the proper functioning of the internal market. The Commission is empowered to identify high-risk third countries which have strategic deficiencies in their anti-money laundering and countering the financing of terrorism frameworks. This reduces the risks that could pose threats to the Union’s financial system.

In line with the Directive (EU) 2018/843 (5 th Anti-Money Laundering Directive) , gatekeepers, such as banks, are obliged to carefully consider business relationships and transactions involving high-risk third countries through increased checks and control measures defined under Article 18a of the Directive.

Latest version of the list of high-risk third countries

On 12 December 2023, the European Commission adopted a new Delegated Regulation in relation to third countries which have strategic deficiencies in their AML/CFT regimes . The Delegated Regulation amends Delegated Regulation (EU) 2016/1675 .

The following jurisdictions are identified as having strategic deficiencies in their AML/CFT regimes:

A consolidated version of the EU list is available (with only measures that already entered into force).

The listing process

Objectives of the list.

The objectives of the list can be subdivided into three main goals:

What are the steps

The listing process follows a staged approach that can be divided into four parts:

Pre-assessment to determine the countries to be assessed and identify the level of priority of their assessment, in addition to countries already listed by the Financial Action Task Force.

Assessment of the relevant 3rd countries’ anti-money laundering and counter-terrorism financing regimes, starting with countries of the highest priority.

Listing high-risk third countries that show strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes.

Monitor progress of listed countries, continue monitoring of already reviewed countries, and assess additional countries.

Methodology

To ensure a fair and transparent process concerning the identification of third countries, the Commission developed a methodology in 2020 . The methodology aims to clarify the measures to identify the high-risk countries based on the faults in their national AML/CTF regimes posing significant threats to the EU’s financial system.

More information on the methodology

Planning of assessment

The Commission carried out a pre-assessment to determine relevant countries to be assessed and the level of priority, in addition to those already listed by the Financial Action Task Force. Countries are considered relevant for the EU financial system in case they meet any of the following non-cumulative criteria

• a country is identified by the European External Action Service or by Europol as having a systemic impact on the integrity of the EU financial system
• a country was reviewed as an international offshore financial centres by the International Monetary Fund
• a country is considered as economically relevant based on the strength of the economic ties with the EU and the magnitude of its financial sector

On this basis, the Commission identified 132 jurisdictions so far that will be further analyzed according to its methodology over the period 2018-2025. The list of 132 countries included in the scope .

With regard to the level of priority

• the Commission reviews as a matter of priority a first group of 54 jurisdiction (Priority 1 countries). The assessment is an ongoing exercise; hence any country will be reassessed when new relevant information sources become available
• the other jurisdictions (Priority 2 countries) will be assessed successively until 2025

Evolution of the list

Based on Directive (EU) 2015/849 and the Commission’s power of adopting delegated acts regarding high-risk third countries, the Commission adopted the following delegated acts:

Publication of  Commission Delegated Regulation (EU) 2024/163 amending the EU list.

Publication of  Commission Delegated Regulation (EU) 2023/2070 amending the EU list.

Publication of Commission Delegated Regulation (EU) 2023/1219 amending the EU list.

Publication of Commission Delegated Regulation (EU) 2023/410 amending the EU list.

Publication of Commission Delegated Regulation (EU) 2022/229 amending the EU list.

Publication of Delegated Regulation (EU) 2021/37 amending the EU list.

Revised methodology for identifying high risk third countries

• FATF lists as a baseline/ and increased synergies with FATF listing process
• additional countries based on EU own assessment based on increased engagement
• Enhanced consultation of Member States’ experts

Publication of Delegated Regulation (EU) amending the EU list

Publication of the Delegated Regulation (EU) 2018/1467 amending the EU list.

First methodology for identifying high risk third countries

• FATF lists as a baseline
• additional countries based on EU own assessment

Publication of Delegated Regulation (EU) 2018/212 amending the EU list.

Publication of Delegated Regulation (EU) 2018/105 amending the EU list.

• Show 8 more items

First EU list – based on FATF lists ( Delegated Regulation (EU) 1675/2016) .

Relevant legislation

Anti-money laundering and terrorist financing directive iv (amld iv) - 2015/849/eu, basic information.

• Text of the AMLD IV (2015/849/EU)
• Summary of the legislation: Preventing abuse of the financial system for money laundering and terrorism purposes

Delegated and implementing acts

• Delegated and implementing acts to the AMLD IV

Transposition by EU Member States

• The AMLD IV was transposed by all EU Member states into their national law.
• Transposition history of the AMLD IV by EU Member States

Ongoing revision

• Ongoing revision of the AMLD IV
• Legislative initiative on the review of AMLD IV

Legislative history

• Original legislative proposal for the AMLD IV
• Impact assessment accompanying the legislative proposal for the AMLD IV
• Executive summary of the impact assessment accompanying the legislative proposal for the AMLD IV

Related links

FATF The Commission is a member of the Financial Action Task Force (FATF), the main international body concerned with combating money laundering, the financing of terrorism and other threats to the integrity of the international financial system.

MONEYVAL The Commission is an observer in Moneyval – the Council of Europe body assessing compliance with AML/CFT standards.

EGMONT The Commission is an observer at the Egmont Group, an international organisation that provides financial intelligence units with a platform for the secure exchange of expertise and financial intelligence to combat money laundering, terrorist financing, and associated predicate offences. 

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AML/CFT Phase 2: Latest Highlights and Updates

Starting June 1, 2024, New Zealand will enact the second phase of amendments to the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009. This second phase follows the first set of amendments that was enacted  in July 2023. The upcoming third phase will be enacted on June 1, 2025.

Let's dive into the significant updates regarding reporting entities' obligations under these new regulations. Reporting entities must ensure they have the necessary systems and procedures to comply with the updated obligations.

Risk Assessments

Reporting entities must review and revise their risk assessments to include emerging technologies, products, or delivery mechanisms before adopting them.

For example, if your firm recently replaced Google searches with an external screening tool to find adverse information on clients or related parties, you should update the relevant inquiry in your risk assessment template accordingly.

Customer Due Diligence Changes

Standard Due Diligence: Legal Persons (e.g. Private Companies) 

The information collection requirement for customers categorised as legal persons/arrangements is expanded under the new regulations. 

For legal persons like private companies or limited partnerships, reporting entities must collect and verify the following:

• Proof of existence
• Ownership and control structure
• Any governing powers and regulations
• For companies: existence and names of nominee directors and shareholders
• For limited partnerships: existence and names of nominee general partners

Standard Due Diligence: Legal Arrangements (e.g. Trusts)

For customers identified as legal arrangements such as trusts, reporting entities must collect and verify the following:

• For trusts: identify the settlor(s) and any protector(s) of the trust

Verification Procedures 

Verification requirements vary based on the new information mandates. Reporting entities must authenticate details against documents, data, or information issued by a reliable and independent source. All other requirements must be verified against a reliable source.

This entails gathering official documents to validate the existence, legitimacy, ownership, and control of legal entities.

For example, for a private company, reporting entities could collect:

• Company extract from the Companies Office or equivalent local registry- to show details of the company, business activities, registration number, registered address, directors and shareholders. 
• Shareholding register - to show details of the shareholders if the legal entity is located in a jurisdiction with no public beneficial ownership information
• Company constitution - to understand the rules, structures and regulations governing the company. 

For a trust, a reporting entity could collect:

• A copy of the trust deed and any amendment deeds from the client - to understand the rules, structure, and regulations governing the trust and to identify the beneficial owners of the Trust.

For a limited partnership, a reporting entity could collect:

• Limited partnership extract from the Limited Partnership register or equivalent local registry - to show details of the partnership, registration number, registered address, and general partner(s) information.
• A copy of the limited partnership deed and any amendment deeds from the client - to understand the rules, structure, and regulations governing the trust and to identify the beneficial owners of the partnership.

Ongoing Customer Due Diligence (OCDD)

The new regulations require additional steps by reporting entities for ongoing due diligence. 

Reporting entities must review, update, and verify any changes in customer information based on the risk level of the customer and transaction. They should also assess the adequacy of the information collected for CDD and consider when it was last conducted.

The triggers for OCDD for a reporting entity may include:

• Change in beneficial owners e.g. new director or shareholder >25% in a company, new trustees or appointors in a trust
• Change in address jurisdiction to a higher-risk country e.g. moving address from New Zealand to Vietnam
• Change in business activities to higher-risk activities e.g. business is now working with South African clients.

E.g. Your firm has OCDD alerts set for review every year for medium-risk clients. You are reviewing a NZ Company set at medium risk. During your review, you have identified that there is a new majority shareholder based in the Philippines (FATF High-Risk Country) and the current director has moved address. You will then need to verify the new beneficial owner, conduct EDD on the new shareholder and collect and verify the new address of the director.

Enhanced Due Diligence (EDD)

Differentiation between source of wealth or source of funds

Reporting entities are required to distinguish between when they should collect and verify a customer’s source of funds information, source of wealth information, or both.

This distinction should be outlined within the compliance program based on the reporting entity’s risk profile and exposure to money laundering risks.

E.g. Based on your reporting entity’s risk profile and exposure to money laundering risks, you may decide that source of wealth will be collected on all captured activities, however, for all conveyancing transactions you may decide that source of funds is more appropriate. 

Additional EDD Requirements

Additional EDD measures are prescribed if typical enhanced CDD measures are insufficient.

These include obtaining further information about a transaction, examining the purpose of a transaction, enhanced monitoring of a business relationship, and obtaining senior management approval.

Reporting entities could collect additional source of wealth/funds information by:

• Expanding the time frame for already collected information e.g. collecting 6-12 months of bank statements VS 3 months of bank statements, past 3 years' financial statements for the entity
• Asking for copies of annual returns, tax returns, and investment portfolio summaries 
• Implementing stricter transaction monitoring controls for unexpected or large transactions.

Reliance within DBGs (Designated Business Groups)

A reporting entity within a designated business group may rely on another member's CDD procedures if they meet or exceed the standards required under the Act and its regulations.

For example, if a New Zealand-based real estate agency is part of an international franchise with offices in countries with equivalent AML requirements, reliance on those offices' CDD procedures may be possible.

Use of agents

Reporting entities who are using external agents to conduct CDD procedures and obtain any CDD information should update their compliance programmes to outline any procedures, policies, and controls relating to:

•  Functions carried out by an agent of the reporting entity as part of the programme
• Vetting agents who carry out functions of the reporting entity:
• Training agents of the reporting entity on AML/CFT matters:
• Maintaining a list of agents of the reporting entity acting in the AML/CFT programme.

Virtual assets

Virtual asset service providers (VASPs) safeguarding or administering virtual assets now face stricter AML requirements.

These regulations apply to transactions involving virtual assets of $1,000 or more. Virtual asset transfers are now defined as wire transfers under the AML Act.

Additional Reading

• Minter Ellison legal update
• Dentons Insights
• Strategi Guidance Note

The 2023 Amendment Regulations in full can be found at the following links:

• Anti-Money Laundering and Countering Financing of Terrorism (Cross-border Transportation of Cash) Amendment Regulations 2023
• Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Amendment Regulations (No 2) 2023
• Anti-Money Laundering and Countering Financing of Terrorism (Exemptions) Amendment Regulations 2023
• Anti-Money Laundering and Countering Financing of Terrorism (Prescribed Transactions Reporting) Amendment Regulations 2023
• Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Amendment Regulations 2023  

About First AML

First AML simplifies the entire anti-money laundering onboarding and compliance process. Its SaaS platform, Source, stands out as a leading solution for organisations with complex or international onboarding needs. It provides streamlined collaboration and ensures uniformity in all AML practices.

First AML transforms an otherwise complex and manual process into one that is simple, cost-effective, and compliant for businesses. By delivering efficiency and time savings, it protects reputations and enables companies to stay on the right side of history in the face of global threats.

Keen to find out more? Book a demo today! No time for a long demo? No problem. See what Source by First AML can do for your business in 2 minutes – watch the short demo here .

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Digital Doppelgängers: Synthetic Identity Red Flags

Synthetic identities have been around for at least 25 years, they’ve just taken on new meaning recently with the rapid rise of AI. Find out what AML leaders should be on the lookout for when onboarding new clients.

Global Credit, AML and Onboarding Operations Audit & Exam Leader

Job Description:

At Bank of America, we are guided by a common purpose to help make financial lives better through the power of every connection. Responsible Growth is how we run our company and how we deliver for our clients, teammates, communities and shareholders every day.

One of the keys to driving Responsible Growth is being a great place to work for our teammates around the world. We’re devoted to being a diverse and inclusive workplace for everyone. We hire individuals with a broad range of backgrounds and experiences and invest heavily in our teammates and their families by offering competitive benefits to support their physical, emotional, and financial well-being.

Bank of America believes both in the importance of working together and offering flexibility to our employees. We use a multi-faceted approach for flexibility, depending on the various roles in our organization.

Working at Bank of America will give you a great career with opportunities to learn, grow and make an impact, along with the power to make a difference. Join us!

Job Description: This job is responsible for leading and executing on internal control discipline and operational excellence within a Line of Business (LOB) or Enterprise Control Function (ECF). Key responsibilities include executing LOB or ECF processes and tools to drive adherence to enterprise-wide standards. Job expectations include supporting the implementation of quality assurance and quality control processes within the LOB or ECF through ongoing monitoring and testing of controls, identifying issues and control improvements for remediation, and building out actions plans and milestones.

Line of Business Job Description:

Principle individual contributor who is an integral and active part of the dynamic Global Business Controls organization under Global Credit AML and Onboarding Operations (GCAOO). The team is seeking to strengthen its risk management governance, accountability, routines, and strategy. The associate for this position would be expected to leverage in-depth subject matter knowledge and a global mindset to lead our Audit and Exam Readiness efforts. The associate will serve as the primary point of contact and risk management expert supporting the GCAOO business units during audits, exams and assessments. The associate will manage the engagement activities, timeframe, and interface between the auditor/regulators and business units. Additionally, the associate will support our proactive risk management efforts in performing targeted assessments and analysis for various business units.

Responsibilities:

• Lead, oversee and coordinate audits, exams and assessments on behalf of the line of business (LOB)
• Partner with key stakeholders, schedule and facilitate meetings, as well as review and document complete and accurate LOB responses
• Track engagement requests, deliverables, and approvals to drive timely and accurate completion of all audit/exam milestones, presentation and artifacts
• Partner with Business Control and Remediation Team on any identified observations, action plan development and issue remediation closure
• Perform proactive risk reviews and testing to validate control effectiveness and adherence to procedures, standards, policies, compliance and regulatory requirements
• Perform due diligence, root cause analysis, and control gap assessments
• Identify control deficiencies, discuss, review, and make recommendations with LOB for process improvements and initiate control recommendations
• Work collaboratively across the regions to support a consistent Audit and Exam Readiness strategy and framework
• Coordinate, track and deliver periodic management reporting and thematic analysis
• Ensure prompt escalation and leadership visibility to 'at risk' activities

Requirements:

• Minimum of 4 years’ experience in an Audit, Risk, Compliance, Business Control or AML environment; Preferred 3 years related to audit and regulatory engagement activities
• Certified Internal Auditor (CIA), Project Management or Six Sigma certification, preferred
• Strong understanding of risk management and core audit methodology principles and practices
• Presentable, confident and client focused. Client facing experience or ability to conduct discussions with senior leaders in a confident manner
• Excellent communications skills (verbal and written) with demonstrated ability to communicate effectively to an executive level audience
• Strong analytical and problem-solving skills to identify trends and risks as well as define alternative mitigation strategies
• Ability to form strong relationships and leverage conflict resolution strategies to gain agreement on risk improvement plans
• Ability to work under pressure in a team environment
• Adapts well to changes and competing priorities
• Ability to liaise with all levels of the firm and people with different experiences and backgrounds
• Self-motivated and able to work independently. Candidate will be able to manage own time and know when to escalate

Other Qualifications:

• Strives to bring new thoughts and ideas to teams in order to drive innovation and unique solutions
• Excels in working among diverse viewpoints to determine the best path forward
• Experience in connecting with a diverse set of clients to understand future business needs – is a continuous learner
• Commitment to challenging the status quo and promoting positive change.
• Participate in and drive collaborative efforts to advance tools, technology, and ways of working to better serve an evolving client base
• Believes in value of diversity so we can reflect, connect and meet the diverse needs of our clients and employees around the world

Hours Per Week:

Weekly Schedule:

Referral Bonus Amount:

Hours Per Week: 

Learn more about this role

JR-24013532

Manages People: No

Travel: Yes, 5% of the time

Street Address

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