Risk Assessment is an integral part of a financial institution's client and related party due diligence and is one of the primary tools used to comply with AML requirements.
Every client that is onboarded and managed through their lifetime with a financial institution are risk assessed to determine the size of the risk posed by doing business with them. They are classified into high, medium and low risk categories. Based on their client risk profile, financial institutions reserve the right not to do business with a client if the risk of doing business with them is outside of their risk tolerance.
Client risk assessments are an important way of keeping financial firms and the wider financial services industry safe from financial crimes such as money laundering, terrorism financing and other illicit activities. They offer firms a risk-based approach to managing clients and their transactions.
Financial crime risk assessments aim to assess and identify a financial institution's potential exposure to risk on an ongoing basis. However, different financial institutions, and perhaps even different business units within the same financial institution, can have varying levels of risk appetite with respect to the customers and transactions with which they wish to engage.
It is, therefore, imperative that financial institutions adopt and implement a customer risk model and methodology that can dynamically respond to the complexities and flexibility required to support multi-jurisdictional and multi-business-line nuances. Failure to do so can result in delayed or inaccurate risk scoring, and the misclassification of high-risk customers.
Key to implementing financial crime risk scoring controls successfully is understanding how to place good data and technology at the heart of customer risk assessments, to not only enable accurate risk scoring, but also reduce manual effort, allowing your organisation to refocus resources where they are needed most.
There are many factors that make up a client risk assessment model and impact the risk profile of a client.
Entity Risk: The type (legal form) of customer, the industries in which they are involved, the nature and purpose of their business and the business relationship. Have they an opaque beneficial ownership structure, have the customer or their beneficial owners been flagged as sanctioned, are politically exposed (PEPs) or have adverse media findings? Have we managed to verify the identity of the customer and their ultimate beneficial owners (UBOs)?
Geography Risk: In which countries does the customer operate and/or engage? Do these countries have any ties or vulnerabilities to money laundering or terrorist financing?
Products/Services Risk: Certain products and services are more appealing to money launderers and offer more scope and risk of illicit activity. Are the parties involved in this account and transactions typical of this customer? What are the delivery/distribution channels involved and their associated risks - for example: face-to-face, online, via third-party intermediaries?
Financial institutions should also screen their customers and related parties against local and global sanctions lists.
With extremely high volumes of customers and complex business relationships, customer risk scoring approaches which rely heavily on analyst input and manual methods place severe strain on operational teams. Financial institutions should consider leveraging technology to automate the calculation of financial crime risk assessments in order to facilitate more accurate and efficient risk scoring. This applies not just at onboarding, but throughout the customer lifecycle through continuous risk monitoring.
To be as operationally efficient as possible, risk scoring technology should offer:
Automation: By integrating API-first risk assessment tooling into your existing technology landscape, you enable automated, on-demand customer risk calculations directly within your onboarding, KYC and/or customer due diligence systems and workflows, ensuring accurate customer risk assessment using the best data available.
Flexibility: The ever-evolving nature of regulatory, economical and customer landscapes means that risk assessment tooling needs to flexible enough to implement required updates to risk models quickly and easily. Financial institutions should look to facilitate these updates through no-code configuration, allowing financial crime risk SMEs to instantly make changes to risk scoring models, reducing reliance on IT support.
Scalability: By centralising customer risk scoring through a single risk technology solution, and deploying it enterprise-wide, financial institutions can more easily manage financial crime risk across multiple business lines and channels, as well as the wider operational ecosystem. This not only helps in eliminating silos between operational and compliance teams, it allows your business to scale, whilst reducing total cost of ownership.
Find out how Fenergo FinCrime Risk can help you reduce risk and manage compliance.