high-risk customer types

Identify High-Risk Customer Types and Prevent your Business from Fraud

During the KYC and AML compliance regulatory procedures, high-risk customers are usually put in one big box and are further treated in the same manner. These customers, however, have to go through the same strategies, management, and assessment. Yet, not all high-risk customers carry the same amount of risks to the company.

Since there are numerous types of high-risk customers, it becomes a challenging task for financial institutions to identify these customers. For instance, if a person is involved in any irregular funds transfers or transactions, it usually presents a higher level of risk.

For this, companies need to perform enhanced due diligence to identify high-risk customer types in order to prevent their businesses from any kind of financial loss or reputational damage.

In this blog, let’s explore seven types of high-risk customers, some red flags to identify them, and several preventive measures to keep your businesses secure from such clients.

Who are High-Risk Customers?

High-risk customers are those customers who tend to be involved in a certain profession or run a particular business where the risk level of money laundering or other financial fraud is high. In simpler terms, high-risk customers are those people who could bring a threat or risk to a business and its operations. In digital platforms, these are the customers who may commit cybercrimes, cause compliance issues, or attempt any fraud online.

In order to recognise high-risk customer types, financial organisations need to conduct enhanced due diligence and continuous monitoring. In this process, they need to implement risk-based approaches to fight against money laundering and other potential threats.

However, such customers may carry numerous types of risks within a company that may involve:

  • Borrowing money with an intention of evasion
  • Attempting money laundering
  • Creating an account using someone’s identity
  • Seizing someone else’s account

Five High-Risk Customer Types

When it comes to implementing AML compliance regulations, the first step is to identify high-risk customers. The high-risk customer types include:

i. Customers with Unusual Transaction History

Customers with Unusual Transaction History

One of the high-risk customer types of any person who is involved in irregular funds transfer activities. For instance, if a customer suddenly begins to deposit a huge amount of money to their bank account, sends or receives large amounts of funds, or transfers money to another country, it could be one of the red flags of money laundering.

Thus, once the customer is onboarded, financial institutions should conduct ongoing monitoring to keep track of their account activities and ensure that the customer is not involved in any kind of illicit activity.

ii. Customers Associated with High-Risk Business

Customers Associated with High-Risk Business

Similarly, there are some industries that tend to be at high risk of fincrimes. However, if a customer is operating or associated with any high-risk business, it will be considered as a high-risk customer KYC.

For instance, if an individual is associated with a business in which a huge amount of cash is involved such as gambling or casino, that has suspiciously high earnings. It may be considered a high-risk business.

Other than this, several high-risk customers may also try to launder money while targeting some specific companies. For instance, they may launder money by making a purchase of a car, property, art, or jewellery using cash. If they successfully make a purchase, they can launder large amounts of cash within a single transaction.

iii. Politically Exposed Persons

Politically Exposed Persons

Politically Exposed Persons or PEPs are individuals who are designated to a prominent public position and are at higher risk of committing corruption. Moreover, due to their influential positions, these people can potentially be abused for the purpose of committing money laundering violations and other offences. If you encounter a customer who is exposed to be a PEP or any person associated with PEP, businesses need to apply enhanced due diligence on such clients.

iv. Customers Linked to High-Risk Countries

Customers Linked to High-Risk Countries

Some countries or regions also pose a high-risk level of financial crimes or fraud. These countries are considered high-risk because of a variety of factors such as high crime rates, natural disasters, political instability, and health risks. Some of these countries include Iran, the Democratic Republic of Congo, Afghanistan, North Korea etc.

These countries have been observed to have strategic inadequacies in their AML and CFT authorities. Due to this, many financial criminals are associated with these countries to successfully launder money. However, the FATF regularly updates high-risk countries to keep track of customers linked to these regions.

v. Customers with Ownership Complexity

Customers with Ownership Complexity

Another example of a high-risk customer in KYC is a person who does not have a clear business ownership structure. If you observe a person with complicated business ownership, the risk levels of money laundering are higher. This is because the business owners might be concealed to hide the proceeds of crime.

According to the FATF, the ultimate beneficial owner of a business is simply a person who ultimately possesses or operates the business and their transactions are conducted in a regular manner. Therefore, by identifying a few factors, a financial company can recognize whether the customer is high risk or not.

Some ways to recognise a customer with complex business ownership include identifying the structure of their taxes and transaction patterns. However, for further information, you can directly ask your clients about several concerns and obtain documents if required.

How to Identify High-Risk Customers?

In order to detect high-risk accounts in banking, several financial institutions use several tools and strategies for this purpose:

  • AML risk detection system
  • Identity verification software
  • Transaction monitoring solutions

However, it is essential to note that the solutions you choose to meet these requirements should fit together and complement each other. Although there might be a comprehensive end-to-end solution available, neobanks and other banks typically use multiple products to guarantee effective security, compliance, and fraud prevention.

How do High-Risk Customers Impact Financial Institutions?

One of the major challenges of dealing with high-risk customer types in a financial institution is that they may encounter a significant amount of regulatory compliance fines. Not only this, employing a high-risk customer may damage a business's market reputation.

Nonetheless, some most common issues that financial institutions may encounter upon hiring a high-risk customer are:

  • Non-payment by loan customers may lead to adverse effects on financial results.
  • Increased rates of chargebacks and acquiring expenses.
  • Disclosure of sensitive or confidential data, resulting in reputational damage
  • Seizing of accounts by fraudulent actors who may take over other customers’ accounts.

Prevent your Business from High-Risk Customers

To tackle AML's high-risk customer types, enhanced due diligence is the ultimate solution. To ensure precise verification, it's essential to gather all significant and insignificant information related to the transaction. Apart from providing robust identity verification checks, conducting enhanced due diligence offers various other advantages. It not only helps businesses gain credibility with other companies and customers but also provides several other benefits.

Our KYC AML Guide ensures to provide you with the contemporary trends in the industry to help you recognise high-risk customer types and prevent your business from potential threats during the onboarding process.

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